gling to attract capital and sustain economic opportu- nity for their residents. The country’s distressed ZIP codes contained 1.4 million fewer jobs in 2016 than they did in 2007.” The two-tier jobs market is reflected in how we value our homes. The National Association of Realtors (NAR) reported that the median price for an existing home was $259,400 in March 2019, marking the 85th straight month of year-over-year gains. That seven-year string of rising prices has not been shared evenly. Research from ATTOM Data Solutions shows that in the fourth quarter at least five million U.S. homes were “seriously” underwater, homes where loan balances were at least 25 percent greater than market values. And yet, even in tough times, the areas that have increasingly been left behind still have much to offer.
“I have personally been raised in one of those dis- tressed communities,” said Sen. Tim Scott (R-SC), who, with Sen. Cory Booker (D-NJ), is one of the two leading backers of the O-zone concept on Capitol Hill, “and I will tell you that the potential in those Opportunity Zones is incredibly high.” OPPORTUNITY ZONE TAX BENEFITS Opportunity zones are designed to encourage eco- nomic development in places where it’s lacking. The usual attractions are insufficient to lure investors and entrepreneurs; as a result, communities wither and become less attractive. To break the cycle, more capital and jobs are needed. And, how do you generate more O-zone investment? With tax benefits. You can’t just plop money into an Opportunity Zone
fied zone, but not defer gains from the sale of assets outside the zone.” Third, “syndicators may organize and market the oppor- tunity funds, which can invest more expansively than ear- lier programs could.” Rosenthal explains that while there are 8,700 Opportunity Zones there were only 40 empower- ment zones as well as just 40 renewal communities. OPPORTUNITY FUNDS Even if you have capital gains that you want to drop into an Opportunity Zone, you can’t simply go out and buy a building or start a project in a particular census tract. Instead, you must invest through a Qualified Op- portunity Fund (QOF). According to the IRS, a qualified opportunity fund (QOF) “is an investment vehicle organized as a corpo- ration or a partnership for the purpose of investing in qualified opportunity zone property (other than another QOF).” A QOF must maintain a number of standards to be within the regulations. At least 90 percent of QOF assets must be repre- sented by qualified opportunity zone properties. A billion-dollar fund armed with expansive tax breaks can invest $100 million anywhere, including far from designated census tracts. “Substantially all” of the tangible property owned or leased by a qualified opportunity trade or business must be within an Opportunity Zone. “Substantially all” means 70 percent according to the interim regulations. Based on all the facts and circumstances, at least 50 percent of the gross income of a qualified opportunity zone business must be derived from the active conduct of a trade or business in the qualified opportunity zone. Up to five percent of the Qualified Opportunity Zones in each state can adjoin an Opportunity Zone and have a medi- an family income not greater than 125 percent of the neigh- boring low-income community. In other words, investors under the program are able to put money into census tracts with a stronger economic profile than the prototype O-zone. A QOF, says Toni Nitti, an Aspen-based CPA writing on Forbes.com, may sell its assets “at any time before 2048 and the taxpayer (can) exclude the gain resulting from the sale.” A caution: The rules for qualified opportunity funds have not been finalized as of this writing. Investors should work with attorneys, investment advisors and tax professionals to assure they fully understand how Opportunity Zones work and the pros and cons associ- ated with them before investing.
and get a juicy write-off. The proposed rules – which are subject to change with publication of the final Trea- sury regulations as soon as early summer – carve out a specific process. In basic terms, an O-zone investment works like this: You have capital gains from investments in stock, real estate, etc. You can pay the tax, or within 180 days from the date of a sale, you can put the gain into a Qualified Opportunity Fund (QOF). With a QOF, you can defer the tax. Better yet, in some cases you may be able to avoid capital gains taxes altogether. Brett Theodos, who directs the Community Econom- ic Development Hub with the Urban Institute, divides potential O-zone tax benefits into three categories: NO. 1 Permanent exclusion of taxable income on new gains. For investments held for at least 10 years, investors pay no taxes on capital gains produced through their investment in Opportunity Funds (the investment ve- hicles that make investments in Opportunity Zones). NO. 2 Basis step-up of capital gains invested. For capital gains placed in Opportunity Funds for at least five years, investors’ basis on the original investment is increased 10 percent. If invested for at least seven years, investors’ basis on the original investment is increased 15 percent. NO. 3 Temporary deferral of capital gains. Investors can place existing assets with accumulat- ed capital gains into Opportunity Funds. Those capital gains are not taxed until the end of 2026 or when the asset is disposed of. Steve Rosenthal, a senior fellow in the Urban-Brook- ings Tax Policy Center and a tax attorney, says Oppor- tunity Zone investments offer three advantages when compared with past efforts such as Empowerment Zones and Renewal Communities. First, says Rosenthal, “a taxpayer need only reinvest gains, not the entire proceeds from a sale of assets. The capital gains provisions of the earlier programs required a taxpayer to reinvest all sales proceeds, not just profits.” Second, “the other programs permitted a taxpayer to defer gains from the sale of assets within a quali-
Q4 2018 UNDERWATER PROPERTIES BY ZIP
Q4 2018 Underwater Properties by ZIP
Pct Seriously Underwater (LTV 125+)
0.18%
70.31%
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54 | think realty magazine :: july / august 2019
thinkrealty . com | 55
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