For many real estate investors, it can be challenging to find a place that provides an opportunity for long-term growth. But a new real estate market has emerged in the last few years—the opportunity zone. If you’re looking to invest in real estate, you should strongly consider real estate opportunity zone investing.
What Are Opportunity Zones?
A qualified opportunity zone is an economically distressed area that has been nominated by the state and approved by the U.S. Treasury Department’s Community Development Financial Institutions (CDFI) Fund. These zones offer investors tax breaks and incentives to invest in businesses or real estate located in these areas. The idea behind opportunity zones is to stimulate economic development and job creation in the regions that need it most.
What Brought About Opportunity Zones In The Market?
The opportunity zone program was established as part of the Tax Cuts and Jobs Act of 2017. The goal was to incentivize investors to put their money into businesses and real estate located in low-income areas. The program has been a big success, with over $75 billion in investments already funneled into opportunity zones.
How Does An Area Become A Qualified Opportunity Zone?
An opportunity zone is only considered a qualified opportunity zone if nominated by the governor of its state and approved by the U.S. Treasury Department’s CDFI Fund.
For an area to be qualified as an opportunity zone, it must have a poverty rate of at least 20% or a median family income of less than 80% of the area’s state average. Additionally, the area must have a high unemployment rate or have a rural designation.
How Can You Find Qualified Opportunity Zones?
Finding qualified opportunity zones isn’t hard. The government keeps track of all areas of the country that have been designated as qualified opportunity zones and provides this information to the public. You can view a list of opportunity zones online that includes the census tract numbers of these zones and the county and state they’re located in. The HUD website also provides a map of qualified opportunity zones that you can use.
What Is A Qualified Opportunity Fund?
A qualified opportunity fund is a type of investment fund that receives special tax treatment due to its real estate investments. The investors in the fund receive preferential capital gains tax treatment on their real estate investments. To qualify for specific tax breaks, the investment vehicle must invest at least 90% of its assets in qualified opportunity zone property.
You can use a qualified opportunity fund to finance various projects and activities, including housing, infrastructure, new businesses, existing businesses, industrial real estate, and commercial real estate. However, to qualify for opportunity fund financing, your investment must substantially improve the property you are investing in.
What Are The Benefits Of Buying Real Estate In A Qualified Opportunity Zone?
It’s well worth your time to investigate potential real estate investments in qualified opportunity zones. The following are some of the benefits you’ll be able to take advantage of should you buy real estate located in a qualified opportunity zone:
Lower Property Prices
The real estate prices in opportunity zones are often much lower than real estate prices in other areas because these zones tend to be located in rural or low-income areas, two areas that investors have historically avoided. As such, the property prices in these areas are often relatively low.
Contribute To Community Development
Investing in real estate within a qualified opportunity zone can also help contribute to community development. By investing in real estate, you bring money into an area that needs it most. You are also providing job opportunities for the community by hiring real estate brokers, contractors, and others to help manage the real estate project.
High Potential ROI
Real estate investments in opportunity zones offer a high potential return on investment (ROI) for several reasons. Because property prices are lower, there’s more room for profit—especially if investors are flocking to the area for the same reason you are. The more investors that buy real estate in an area, the more money goes into the neighborhood, which will boost growth in the community and, as a result, help boost property values.
Reduce And Defer Capital Gains Taxes
By investing in real estate within a qualified opportunity zone, you can reduce the amount of taxes you owe on your capital gains. First of all, you can put existing assets located in opportunity zones that have already accumulated capital gains into an opportunity fund. If you do this, you can defer the taxes owed on those capital gains until the end of 2026 or when you sell the asset (if sold before 2026).
Finally, you won’t have to pay any taxes on capital gains earned from the opportunity fund as long as the fund sustains the investment for a minimum of 10 years.
What Are The Risks Of Investing In Real Estate In An Opportunity Zone?
Despite the many benefits of buying property in opportunity zones, investing in opportunity zone real estate is not without its risks. The following are a few risks that you should be aware of if you’re thinking about investing in an opportunity zone:
Demand For Homes In Opportunity Zones May Be Low
The real estate market in opportunity zones isn’t as strong as the real estate markets in other areas such as major cities. As such, there may not be as much demand for homes in opportunity zones as there is for properties in nonqualified zones.
If there isn’t a lot of demand, it could be challenging to sell real estate in the area. You’re essentially banking on the area experiencing growth as activity in the area builds and other investors are attracted to the area.
You Must Meet Financial Guidelines To Invest
Not just anyone can invest in real estate located within a qualified opportunity zone. To be eligible, you must meet specific financial guidelines. First of all, you must be an accredited investor. You’ll also have to meet one of the following requirements:
- You have a net worth of at least $1 million. This net worth excludes your primary residence.
- You have earned at least $200,000 a year for two years in a row as a single tax filer.
- You’ve earned at least $300,000 a year for two consecutive years as a married filer.
It’s also worth mentioning that most opportunity zone funds require a minimum of a six-figure investment.
Historic Success Of Opportunity Zone Investments Hasn’t Been Established
In many cases, real estate in opportunity zones has been designated as such based on future projections. In other words, real estate investors are taking a chance to invest in opportunity zones without concrete evidence that these areas will experience significant growth.
The success of opportunity zone investments has yet to be established due to how new the program is. That being said, real estate investors have a lot to gain by investing in opportunity zones.
A Real Estate Investor’s Obligation To Improve Opportunity Zones
As an investor, it’s not only your responsibility to make money from real estate in opportunity zones—you’re also obligated to improve the communities where you’re buying property.
If you invest in real estate located within an opportunity zone, it’s essential to make a commitment to the community, whether it’s by hiring employees from the area, using local businesses for supplies and other real estate services, or even offering your real estate as a space for community events.
If you can’t or won’t demonstrate that you’re going to do anything other than try to turn a profit, you’ll likely meet resistance from members of the community. Not only will this hurt your public perception, but you may even meet legal challenges from community leaders that could delay your project.
Real Estate Ideas For Community Development In Opportunity Zones
Community development is a critical part of improving opportunity zones. As an investor, you may be wondering how you can get involved in community development in opportunity zones.
One way to do this is by donating money to local organizations working on community development projects. Another option is to offer real estate as a space for community events like concerts, fairs, and festivals.
Whatever route you decide to take, make sure that you’re contributing to community development in the opportunity zone. If you’re not, you’ll likely find it difficult to make money from real estate in that area.
Consider Looking At Qualified Opportunity Zones
Although the real estate opportunity zone tax break has been around since 2017, it’s not too late to get involved. Real estate investors may want to consider getting involved in opportunity zones sooner rather than later. That’s because, as the program becomes more popular, prices for real estate in opportunity zones are likely to increase. As such, there’s never been a better time to invest in properties at such a low cost with such potential for a high ROI.
As an investor, it’s important to continuously look for new opportunities. Doing so is especially critical when it comes to real estate investing. With that in mind, it’s worth looking at opportunity zones to see if they’re right for you.
How Can You Start Investing In Opportunity Zones?
To invest in an opportunity zone, you will need to place qualified capital gains into an opportunity fund by December 31, 2026. To be eligible for an opportunity fund, these capital gains must come from the sale of real estate, private businesses, stocks, or bonds, and they must be rolled into the fund within 180 days from the date they were generated.
Remember that you can invest nonqualified capital gains funds into an opportunity fund; however, those capital gains funds will not be eligible for the same tax benefits.
Get Funding For Your Real Estate Investment Now
Many real estate investors have already benefited from the opportunity zone program, and there will certainly be more in the future. If you’ve decided to invest in an opportunity zone fund, then be sure to reach out to us at Pine Financial Group for help securing the funding you need for your opportunity zone project.