There was a provision in the Tax Cut and Jobs Act of 2017 (Tax Reform) that flew under a lot of radars,
including those of many in who make their livelihood in commercial real estate-related fields. The
provision – 26 U.S.C. § 1400Z-1&2 – created Opportunity Zones (OZ), which I liken to a combination
between a 1031 exchange and New Markets Tax Credits (NMTC). The program is similar to the 1031
exchange in that it can defer capital gains that would ordinarily be owed following the sale of property
by an investor, and similar to NMTC in that it is intended to incentivize investments in economically
distressed communities.
including those of many in who make their livelihood in commercial real estate-related fields. The
provision – 26 U.S.C. § 1400Z-1&2 – created Opportunity Zones (OZ), which I liken to a combination
between a 1031 exchange and New Markets Tax Credits (NMTC). The program is similar to the 1031
exchange in that it can defer capital gains that would ordinarily be owed following the sale of property
by an investor, and similar to NMTC in that it is intended to incentivize investments in economically
distressed communities.
What do OZs do? Briefly, they can defer capital gains for five years for investments made in qualified
OZs. After the fifth year, taxes may be cancelled on ten percent of the original capital gains investment
and deferred for the remainder. After the seventh year, taxes may be cancelled on fifteen percent of
the original capital gains investment, and the remainder may be deferred through 2026. And for
investments lasting ten-plus years, investors are exempt from capital gains taxes on the OZ investment
itself, in addition to the other benefits for capital gains carried into the investment.
OZs. After the fifth year, taxes may be cancelled on ten percent of the original capital gains investment
and deferred for the remainder. After the seventh year, taxes may be cancelled on fifteen percent of
the original capital gains investment, and the remainder may be deferred through 2026. And for
investments lasting ten-plus years, investors are exempt from capital gains taxes on the OZ investment
itself, in addition to the other benefits for capital gains carried into the investment.
It’s a lot to wrap your head around, but once you do, you’ll concur that this is an incredible program.
Other commentators have realized that as well, penning articles titled An Unlikely Group of Billionaires
and Politicians has Created the Most Unbelievable Tax Break Ever and Opportunity Zones: Building the
Plane While Flying It.
Other commentators have realized that as well, penning articles titled An Unlikely Group of Billionaires
and Politicians has Created the Most Unbelievable Tax Break Ever and Opportunity Zones: Building the
Plane While Flying It.
Two logical questions about OZs are 1) where are they, and 2) where can I get more information on
them?
them?
Each state’s governor proposed OZs, which were subsequently approved by the Department of
Treasury. In Louisiana, many proposed OZs were generated via suggestion by economic development
agencies. Louisiana Economic Development, the largest such agency, has put together a neat GIS tool
showing OZs across the state. Here’s a capture of their location within the city of New Orleans
(highlighted in blue):
Treasury. In Louisiana, many proposed OZs were generated via suggestion by economic development
agencies. Louisiana Economic Development, the largest such agency, has put together a neat GIS tool
showing OZs across the state. Here’s a capture of their location within the city of New Orleans
(highlighted in blue):
And here’s a zoomed in image of their location within New Orleans’ historic core:
Per the text of the Tax Reform bill, the aim of the OZ program was to identify “lower-income census
tracts”, including those with poverty rates of at least twenty percent, or those with median family
incomes of no more than eighty percent of statewide or metro area family income. I would argue that
some of the identified census tracts, while perhaps meeting the letter of this portion of the law, likely
don’t meet it in spirit. But nevertheless, it’s likely that decision makers also took into account areas
which were likely to support the additional new investment that OZs are anticipated to encourage.
And with the already existing momentum in many of the OZs, such support shouldn’t be a problem.
tracts”, including those with poverty rates of at least twenty percent, or those with median family
incomes of no more than eighty percent of statewide or metro area family income. I would argue that
some of the identified census tracts, while perhaps meeting the letter of this portion of the law, likely
don’t meet it in spirit. But nevertheless, it’s likely that decision makers also took into account areas
which were likely to support the additional new investment that OZs are anticipated to encourage.
And with the already existing momentum in many of the OZs, such support shouldn’t be a problem.
Getting back to the location of the OZs, you’ll see that large swaths of core neighborhoods – from the
Warehouse District, Central Business District, Central City, Treme and Mid-City – are included. That
means – you guessed it – opportunities await investors who can secure investments in these areas.
Warehouse District, Central Business District, Central City, Treme and Mid-City – are included. That
means – you guessed it – opportunities await investors who can secure investments in these areas.
The concept of OZs can be difficult to wrap one’s head around. Luckily, plenty has been written about
the nascent program since it came into existence less than one year ago. You can go direct to the
source with IRS’ FAQs, or Treasury’s Opportunity Zones Resources. Or you can seek out guidance from
the private sector, like Novogradac & Co.’s Opportunity Zones Resource Center. For those readers in
New Orleans (or for those looking for an excuse to travel to New Orleans), Novogradac & Co. is also
putting on a first-of-its-kind Opportunity Zone Conference here in October.
the nascent program since it came into existence less than one year ago. You can go direct to the
source with IRS’ FAQs, or Treasury’s Opportunity Zones Resources. Or you can seek out guidance from
the private sector, like Novogradac & Co.’s Opportunity Zones Resource Center. For those readers in
New Orleans (or for those looking for an excuse to travel to New Orleans), Novogradac & Co. is also
putting on a first-of-its-kind Opportunity Zone Conference here in October.
I can’t tell you how much tax savings you stand to benefit from by investing in an OZ. And I can’t
advise you on the partnership structure of your OZ investment. But I, and the other agents in our
office, can certainly help you locate investment opportunities within the boundaries of qualified OZs.
Please reach out to let us know how we can help!
advise you on the partnership structure of your OZ investment. But I, and the other agents in our
office, can certainly help you locate investment opportunities within the boundaries of qualified OZs.
Please reach out to let us know how we can help!
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| Jonathan Shaver, CCIM jshaver@nolacommercial.com (504) 838-0001 (504) 579-4082 |
