This article will explain what an opportunity zone is, how opportunity zones were created, how to invest in an opportunity zone, and how opportunity zones help incentivize investments.
Please note that this article is for informational purposes only; Geyser is not providing investment or tax advice. We recommend that you research and discuss these opportunities with professionals before investing.
What is an Opportunity Zone?
In general, Opportunity Zones are areas across the United States representing distressed communities that could benefit from investment and economic development 1. In 2017, the Tax Cuts and Jobs Act introduced opportunity zones to incentivize investment in lower-income communities by outlining specific tax benefits individuals can receive when investing within these zones 2.
How Were Opportunity Zones Created?
Under the Tax Cuts and Jobs Act of 2017, low-income communities and neighboring areas sourced through population census tracts could qualify as opportunity zones 3. State legislators hand-picked communities they felt could benefit from investment and nominated specific tracts for consideration. Then, the U.S. Department of Treasury and the IRS certified the nominated areas. Currently, the United States has 8,764 Opportunity Zones, and roughly 23% are located in rural areas throughout the 50 states, five U.S. territories, and the District of Columbia 4. Click here to view the current list of all Opportunity Zones in the U.S.
Benefits of an Opportunity Zone
Breaking it Down
For example, let’s say an individual sold stock in 2023, generating $100,000 in capital gains. The individual then invests their entire gain into a QOF within the 180-day window. Because the individual invested before the 180-day period ended, the “first” capital gain is not taxed in 2023. Instead, the capital gains taxes owed on the “first” $100,000 gain would not have to be paid until December 31, 2026. Then, if the opportunity zone investment is held for ten years and the investor receives $300,000 in total returns from the asset’s sale, the $200,000 “second” capital gain is tax-exempt.
Has Opportunity Zone Legislation Changed Since 2017?
On April 7, 2022, the Senate Finance Committee proposed the Opportunity Zones Transparency, Extension, and Improvement Act to revise, improve, and extend opportunity zone investing activities. Through this Act, the opportunity zone qualification process will be modified to exclude opportunity zones in areas with median family income exceeding 130% of the national median family income8. Furthermore, this revision will focus on places where at least 40% of the population has lived in poverty since 19809.
Another revision outlined in the Opportunity Zones Transparency, Extension, and Improvement Act is to extend the temporary deferral period for invested capital gains until December 31, 2028, a two-year extension from the original timeline. Additionally, the holding period for investors to defer capital gains taxes by up to 15% will decrease from seven to six years.
Finally, the bill will establish a State and Community Dynamism Fund to support small businesses, communities, and public/private investments. The bill will allocate $1 billion for states to use in the following scenarios:
- Build housing in high-poverty, rural, and otherwise underserved communities
- Advance investment in minority, women, and veteran-owned businesses
- Development of workforce housing in specific sectors
- Affordable Housing with at least 50% of the units affordable to families making less than 80% of the median family income.
It is important to note that the revised Opportunity Zone bill has yet to be passed and is up to the decision of the 118th U.S. Congress. Click here to read the full Opportunity Zones Transparency, Extension, and Improvement Act.
Geyser’s Opportunity Zone Development: The Goodwin
In 2017, The U.S. Department of Treasury established 21 Opportunity Zones in Austin to promote more development for low-income areas while encouraging affordable housing10. One of these Opportunity Zones covers the property located at 3706 Goodwin, where Geyser and Sabot Development’s 363-unit multifamily development is currently under construction.
In 2019, Geyser and Sabot Development purchased the 68-unit Goodwin Apartment Homes in East Austin. Sabot rezoned the site to redevelop the complex into 363 units while keeping 10% of units affordable. Furthermore, Sabot Founder Jim Young was committed to rehousing the displaced tenants of the former Goodwin Apartments and mapped out a plan for them to return to the newly built apartment complex in 2024.
To receive opportunity zone investments in The Goodwin, Geyser and Sabot set up a Qualified Opportunity Fund to use as an investment vehicle11. Geyser and Sabot then allowed individuals to invest their capital gains into the deal, meaning investors’ capital gains taxes were deferred until December 31, 2026. In addition, Geyser and Sabot plan to hold the project for at least ten years to fully capitalize on the Opportunity Zone’s tax benefits (i.e. the tax exemption on the “second” gain).
The Goodwin will provide 363 units of Class- A multifamily apartments to the growing East Austin community. In tandem with the increased housing potential, The Goodwin will aid in the economic growth of East Austin through 2,400 square feet of retail space on the ground floor of the complex. The Goodwin is set to deliver in early 2024, with the unit framing currently underway.
If you want to learn more about Geyser’s development pipeline, please check out our Project Portfolio Page.
References
1 Investopedia 2022, What is an Opportunity Zone?
2 IRS 2022, Opportunity Zones
3 IRS 2022, Facts About Opportunity Zones
4 HUD 2022, Housing and Urban Development
5 HUD 2022, Investors in Opportunity Zones
6 Wells Fargo 2022, Qualified Opportunity Zones- What Investors Should Know
7 HUD 2022, Investors in Opportunity Zones
8 Congress.gov 2022, Opportunity Zones Transparency, Extension, and Improvement Act
9 Congress.gov 2022, Opportunity Zones Transparency, Extension, and Improvement Act
10 AustinTexas.gov 2022, Opportunity Zones in Austin
11 HUD 2022, Establishing a Qualified Opportunity Fund
IRS 2022, Opportunity Zone FAQ