Brooklyn Opportunity Zones
Updated: May 24
Real estate joint investment ventures are typically an attractive opportunity for developers and investors. In the United States, if an investor recently sold an investment, they can defer for ten years the obligation to pay taxes by investing in an Opportunity Zone. The icing on the cake is that they could have the taxes wholly waived if the property isn't sold; when the money stays in the real estate investment for the entire ten years. The US Opportunity Zone Map includes properties in distressed areas, and parts of Brooklyn qualify. Developers, investors, and communities all stand to gain from Qualified Opportunity Funds (QOFs).
A Qualified Opportunity Fund is an investment vehicle used to either file a corporate or partnership federal income tax return. It is organized with the sole purpose of investing in a Qualified Opportunity Zone property. You can access the complete list of the QOZs here. To become a Qualified Opportunity Fund, an eligible partnership or corporation self-certifies by filing Form 8996 annually alongside its federal income tax return.
Even if you don't work, live or have business in a Qualified Opportunity Zone, you can still take advantage of these federal tax incentives and waivers. It's not just for corporations, partnerships, and individuals, estates, trusts, Regulated Investment Companies (RICs) as well as Real Estate Investment Trusts (REITs) can also join. All that is needed is for you to invest in a Qualified Opportunity Fund and choose to defer the tax gain on it.
What is an Opportunity Zone?
Created under the 2017 Tax Cuts and Jobs Act, Opportunity Zones are economically distressed communities where, under certain conditions, new investments may qualify for preferential tax treatment. A Qualified Opportunity Fund is a privately run or managed investment vehicle assembled as a partnership or corporation for investing in QOZ property. In turn, the QOF must invest over 90% of its assets in a QOZ property located within a qualified QOZ.
OZs are low-income communities spread across the US where more than 30 million Americans live and work. They cover rural areas, suburban, downtown, and industrial areas, and form part of the daily life for many people in the US. Low-income neighborhoods and specific neighboring communities (as defined by the US population census tracts) may qualify as Opportunity Zones (OZs). Respective states nominate qualifying communities for the OZ designation, and the US Department of the Treasury does the nomination certification.
You can finance a wide range of projects and activities with Opportunity Funds. Potential sectors include industrial and commercial, housing, real estate, infrastructure, start-ups and existing businesses. To qualify, the investment in real estate projects must lead to substantial improvements in the properties.
When measured or assessed by socioeconomic standards, OZs seem better targeted. Designated tracts have more poverty, lower incomes, and higher unemployment compared to non-designated tracts. Homeownership rates, values, and rents are also lower. Also, the designated tracts are more black and Hispanic and less white. Educations levels are somewhat lower, but ages are similar.
The Benefits of Investing in an Opportunity Zone
Opportunity Zones are an incentive for investors to move capital in a more inclusive fashion across America. To move more quickly and to more locations where naturally it wouldn't end up. Investors and vertically integrated real estate firms such as Brownstone NYC place their existing assets into Opportunity Funds and target Opportunity Zones in NYC using accumulated capital gains. Existing capital gains will not be taxed until 2026 or when the investor disposes of the asset. Any individual or corporation with capital gains qualifies for OZFs.
The idea behind Opportunity Zones is to encourage those blessed with the means to endeavor and make a difference in the lives of others by making new investments into low-income areas and still get good returns. The Opportunity Zones program offers several benefits for those investing through a Qualified Opportunity Fund.
1. Temporary Tax Deferral
Funds invested in Opportunity Zones stand to benefit from a temporary tax deferral; from being included in capital gains taxable income. To obtain this tax deferral, the eligible capital gain resources must be timely invested in a Qualified Opportunity Fund in exchange for an equity interest in the qualifying investment (QOF).
2. Step-Up Basis for Reinvented Capital Gains
The program provides a step-up basis for reinvested capital gains in a QOF. The basis increases by 10% if the Opportunity Fund investment is held for at least five years by the taxpayer. It increases by an additional 5% if you keep the asset for at least seven years, effectively excluding up to 15% of the original figure gained from taxation.
3. Permanent Exclusion from Capital Gains Taxable Income
A permanent exclusion from capital gains taxable income from the exchange or sale of an investment in an Opportunity Zone (OZ) is applicable if you hold the investment for at least ten years. The exclusion is only applicable to accrued gains after an investment in an Opportunity Fund (OF).
Why now is the Right Time to Invest?
Opportunity Zones were a centerpiece of Donald Trump's reelection pitch during the last election to Latino and African American communities. Supporters of the Federal tax breaks argued that over 8,700 zones have witnessed transformative investment that would otherwise have been left behind.
As the COVID-19 Pandemic continuous to create economic uncertainty and the possibility of a global recession, experts argue that countercyclical investments could become more attractive for investors. Things that have a habit of being countercyclical, such as assisted living facilities or affordable housing, are well-positioned and ideal for Opportunity Zones. Although the COVID-19 crisis effectively slowed down the Qualified Opportunity Zones momentum, the Federal IRS provides welcome relief for investors and renews hope through Notice 2020-39, issued in June 2020.
While the Pandemic has a substantial impact on most businesses and the economy, it has also offered some unique opportunities in terms of Qualified Opportunity Funds. Many investors have chosen to sell assets to maintain their personal lifestyles or business operations. The sale of such assets is likely to bring the realization of both short-and long-term capital gains. This will likely present individuals and businesses with unique investment opportunities in the real estate market, such as in New York City —particularly those within the Opportunity Zone Map.
The Biden administration has praised the Opportunity Zone (OZs) program as an important tool for economic development but wants to sharpen it by demanding more transparency. Experts are not expecting the new President to water down the program or ditch it altogether.