Opportunity Zone Map

CENTRAL TEXAS - OPPORTUNITY ZONE MAP

Map of Austin Texas Opportunity Zones and 18 in East Austin

AUSTIN TEXAS - OPPORTUNITY ZONE MAP

Opportunity Zone

The rush to protect Wealth is on.

Understanding Opportunity Zones

As of April 2, 2024

Opportunity Zones play a crucial role in U.S. tax legislation and the commercial real estate market, designed to drive economic revitalization in economically lagging districts through tax incentives for investors. These zones were introduced by the Tax Cuts and Jobs Act of 2017 and are specifically chosen regions by state and federal authorities to receive economic boosts. For commercial real estate investors, these zones offer substantial tax benefits which enhance their investment portfolios and aid in community development.

In Austin, Texas, notably in East Austin, 18 of the city's 21 Opportunity Zones are creating vibrant opportunities for development and investment, reflecting a strong market potential for both investors and the community.

 

 “The Opportunity Zones Program is the biggest economic development initiative in 50 years. “

~ DARREN WALKER, FORD FOUNDATION 

WHY INVEST IN OPPORTUNITY ZONES

Following the Great Recession, recovery across the United States has been uneven. Cities such as New York and Chicago have recovered, while areas such as Detroit, Flint, and Appalachia are still struggling. Buried in the recent tax overhaul was a provision intended to address some of these discrepancies and ultimately create a new asset class. Private investors can receive tax benefits in exchange for helping to revitalize low-income areas and, in theory, create jobs and boost local economies. As such, Opportunity Zones provide benefits for both the community and investors.

 
 

 BIG PICTURE

 A Qualified Opportunity Fund (QOF) is a corporation or partnership in which taxpayers can “roll over” capital gains and obtain special tax benefits. ~ Jackson Walker Senior Council Attorney ran several “Test Projects” and found potential 30--40% increase in return

 
QOZ Deadlines East Austin Opportunity Zone .png
OZ Compared to 1031 East Austin .jpg
 

Who Benefits

Real Estate Investors: May obtain tax benefits only if “rolling over” capital gains, and especially if prepared to hold 10 years.

Real Estate Developers/Sponsors: May obtain a lower cost of capital (or charge a higher promote) in exchange for a promise to pursue QOF tax benefits for investors (but cannot obtain tax benefits directly for carried interest / promote). 

 

Overview of the QOZ Program

  • Created as part of the Tax Cuts and Jobs Act of 2017

  • Meant to encourage high net worth and ultra‐high net worth individuals to “unlock stagnant capital” and redirect it into economically distressed areas of the country

  • Governors of U.S. states and territories nominated the QOZs, and Treasury certified the QOZs in the summer of 2018 – 12% of total USA landmass

The program motivates investors to channel their unrealized capital gains into Opportunity Funds, which are investment tools dedicated to investments within these designated zones. These funds must invest at least 90% of their assets in eligible properties or businesses in an Opportunity Zone. Here’s the general flow:

1. Asset Liquidation: Investors sell off assets, accruing capital gains.

2. Reinvestment: These gains must be reinvested into an Opportunity Fund within 180 days from the asset sale.

3. Tax Deferral: The tax on the sold property gains is deferred until December 31, 2026.

Three Main Tax Incentives Offered:

  1. Deferral of capital gain until payment of 2026 taxes

  2.  Exclusion of profit from income taxation after a ten‐year holding period

    • Capital Gains Exemption: For investments kept for 10 years or more, the basis of the Opportunity Fund investment is escalated to its market value at the time of sale or exchange, exempting any gains from capital gains taxes.

Recent Federal Legislation – Tax Cuts and Jobs Act - December 22, 2017

  • Established a new community development program with the creation of Opportunity Zones (“OZ”) to encourage economic development and long- term (+10 years) capital investment

  • Significant tax savings to investors for investing in a subset of low-income urban and rural communities nationwide

  • Allows investors to re-invest unrealized capital gains (short term and long term, any type of gain) into Opportunity Funds that are dedicated to investing in qualified OZ’s

  • Defers capital gains tax for up to seven years

  • Investments held +10 years will be capital gains tax free (subject to legislation protocol)

Impact on Commercial Real Estate

The Opportunity Zone initiative influences the commercial real estate sector in significant ways:

  • Encourages Investments in Neglected Neighborhoods: The incentives promote investments in areas that require economic uplift, potentially increasing property values.

  • Modifies Investment Strategies: The attractive tax advantages support long-term investment strategies, ensuring alignment with the overarching goals of economic improvement.

  • Draws a Broad Investor Spectrum: The combined lure of tax savings and potential economic upturns brings a diverse array of investors, boosting capital influx into commercial real estate ventures in these zones.

In Austin, Texas, notably in East Austin, 18 of the city's 21 Opportunity Zones are creating vibrant opportunities for development and investment, reflecting a strong market potential for both investors and the community.

 

QOZ Investing

QOF real estate development generally must be done through a subsidiary “QOZB” that must be funded in cash and acquire its assets from an unrelated party. 

Eligible Gain to Invest

  • Qualified Opportunity Funds: Only Capital Gain from the Sale of Any Property to an Unrelated Person

Format of Investment

  • Qualified Opportunity Funds: Directly into Qualified Opportunity Funds Only

  • Regulations allow investment in the form of both cash and property (to the extent of basis, not FMV)

Period of Deferral

  • Qualified Opportunity Funds: Until Payment of 2026 Taxes

Eligible Types of Investment

  • Qualified Opportunity Funds: Generally, Real Estate or Business

  • Interests Acquired from an Unrelated Person After 12/31/2017

Method of Investment

  • Qualified Opportunity Funds: Taxpayer May Hold Funds Directly

• Investment Time Limits

  • Qualified Opportunity Funds: 180 Days from Date of Sale

  • Unless Taxpayer was Part of a Pass‐Thru (in which case taxpayer chooses between 180 days from date of sale or end of the taxable year in which the sale occurred)

  • Unless Net Section 1231 Gain (in which case the timer starts 12/31 of the taxable year)

Required Investment for Tax Deferrals

  • Qualified Opportunity Funds: Requires Reinvestment of Capital Gain Portion of Sale

Treatment of Leverage

  • Qualified Opportunity Funds: Indebtedness Only Replaced by Leverage Against QOF Equity Interest, Not Against QOF Underlying Assets

Ongoing Compliance

  • Qualified Opportunity Funds: “90% Test” Every Six Months; “70% Test” for Subsidiary Entities; Form 8949 for Gain Deferral; Form 8996 for QOFs; “Original Use” or “Substantial Improvement” for Real Estate/Tangible Property – No “Turnkey” Properties 

Investor Eligibility

  • Qualified Opportunity Funds: Third Party Sponsors’ Funds Generally Open Only to Accredited Investors; Otherwise Investor Must Form Her Own

Treatment of Refinances

  • Qualified Opportunity Funds: Generally Allowed, Subject to Anti‐ Abuse Regulations – Post‐Stabilization Recommended

Pass‐Thru Entity Exits

  • Qualified Opportunity Funds: Investor Can Defer Pass‐Thru Gain Without Pre‐Sale Planning 

Development Window - 31 Months

  • Developing a 31‐month plan is a crucial step because it permits the cash from investors to be funded in and meet various timing deadlines.  -