By VICTORIA VELAZQUEZ | Special to the Palisadian-Post
There has been a lot of buzz around a new program investors have to stimulate investment in low income areas in exchange for significant federal tax benefits. For many reasons, these “Opportunity Zones” present an interesting new option, but how do you know if this is the right move for you?
First, it’s important to understand the basics. Today, there’s 8,700 opportunity zones across all 50 states. They are by definition distressed areas that have historically been ignored by commercial institutional investors.
The hope is that in exchange for significant tax benefits, the “OZ” designation will help stimulate long-term investment to rebuild and stimulate the local economies. The idea being that both investors and the communities will benefit alike.
This investment is particularly interesting because unlike a 1031 exchange, it allows you to reinvest capital gains from any investment, including stocks, bonds, real estate and partnership interests.
Your capital gains would be invested via qualified opportunity zone funds or “QOFs,” which can run the gamut from a small local group focused on one project to a large institutional fund sponsor with millions of dollars of assets under management. Also, unlike a 1031 exchange, you get not only deferred but also permanent tax benefits.
However, as with any investment, not all “QOFs” are created equal and while there’s enough potential to generate interest, it’s incredibly important to understand what the downsides may be to mitigate any risk.
Some things to think about—it seems obvious, but these areas are opportunities zones for a reason. They are often low income communities where there is already economic distress.
Thinking about how that will play out with market conditions is important. Imagine your investment experiencing a worst case scenario, would the opportunity still be profitable?
The benefit for these investments really kick in with profit, so if you don’t end up having notable profit, the incentive is not really there.
In real estate, we always come back to location, location, location. Location is incredibly important and there are definitely some opportunity zones that are more favorable than others.
Home prices in some areas have already jumped up to 20% diminishing expected returns. Finding the QOZs that will perform for the long term period you will need to hold is key.
As a new program, there are still a lot of questions about how it will function and play out over the next few years. Can this legislation be overturned and put investors at risk of not receiving benefits? What are the latest updates in the code that as of January 2019 was still incomplete? Will California decide to follow the federal tax treatment?
Finding a fund manager who knows what they are doing and can stay on top of the latest developments is incredibly important.
Lastly is time. Are you comfortable with illiquidity for 10 years (minimum six) and do you feel confident that your fund sponsor will be around and able to perform for that timeline as well?
The potential benefits of opportunity zones are real and worth exploring, but a healthy level of caution and due diligence is key in finding out if it is the right move for you.
Victoria Velazquez is a sales partner at Amalfi Estates. With her team, she has helped over 700 families buy, sell and invest in residential real estate, selling over $1 billion in properties in Los Angeles. Contact her at 310-614-4240, firstname.lastname@example.org or at 984 Monument Strett #105.