When the U.S. government passed the Tax Cuts and Jobs Act in 2017, part of that legislation involved a new program to encourage economic growth in struggling areas that could use an influx of capital investment. The program, known as Opportunity Zones, provides tax incentives for long-term investment in designated census areas.
The Economic Innovation Group, a policy think tank that came up with this program, estimates that there is currently $6 trillion in unrealized capital gains held by U.S. investors that could go to better use. Not only has the program generated excitement among policymakers and economists but also real estate investors that can benefit financially.
How the Opportunity Zone Tax Incentives Work
The new program provides three types of tax incentives for anyone that has capital gains from previous investments: delaying paying taxes on those gains, a reduction in the taxable basis for the gains, and a complete exemption from taxes on any of the fund’s future appreciation.
If a taxpayer has capital gains from the exchange or sale of an asset, they can defer taxation by reinvesting those gains into a Qualified Opportunity Zone (QOZ) within 180 days. Those taxes will become due once the new asset is sold or exchanged or on December 31, 2026, whichever comes first.
If the investor holds the new investment for at least five years, 10% of the original investment gains are exempt. This figure increases to 15% if the investment is held for seven years.
If the investor holds the new investment for 10 years, the cost basis (original value) of the QOZ will be adjusted to fair market value, which will permanently exempt the sale from capital gains taxes.
Encouraging Additional Commercial Real Estate Investment
This is a lucrative program that is sure to attract more commercial real estate investment in areas that need it most. And the good news is that there are plenty of QOZs to choose from.
The IRS and U.S. Treasury have certified over 8,700 QOZs across the U.S. and its territories, and these were done by census tracts. For example, the entire island of Puerto Rico is now a QOZ, and you can view the entire list on this map.
The QOZ program requires that investors create a Qualified Opportunity Fund and that at least 90% of that fund’s capital be invested in fund assets. To qualify, a business must have substantially all of its tangible property in the QOZ. Certain businesses are excluded, such as liquor stores, country clubs, and massage parlors. The QOZ must also make “substantial improvements” to any property within 30 months of purchase.
Real estate investors and entrepreneurs have a unique opportunity to spearhead new commercial construction projects with these incentives. These might range from renovation to new construction. For any investor not familiar with commercial construction projects, the 30-month time limit and other constraints of the program can be daunting. This is why having an experienced and qualified commercial contractor in your corner is invaluable.
K-Con, Inc. for Your Next Commercial Real Estate Project
Opportunity Zones have opened up trillions in commercial real estate opportunities over the coming decade, and K-Con, Inc. can help your organization achieve its goals.
We are a licensed design-build contractor that offers turnkey engineering, construction & renovation, and site prep & installation services for pre-engineered metal buildings. We’ve completed 650+ contracts for commercial and government clients throughout the U.S. and its territories.
Contact us now to find out more about how our services can complement your upcoming Opportunity Zone project. Be sure to ask about our fast turnaround for preliminary drawings and pricing.