Opportunity Zones have become a buzzword throughout the real estate industry. Identified as economically distressed census tracts in a community, they offer a method whereby private funds are utilized for development instead of government/taxpayer funds. These private funds foster job creation and economically stimulate areas of investment. Investors who devote funds into Qualified Opportunity Zones or into Qualified Opportunity Funds are eligible for deferrals or even elimination of capital gains taxes.
The Opportunity Zone program was created through the 2017 Tax Cuts and Jobs Act. Each state nominated eligible census tracts which were then certified by the Secretary of the U.S. Treasury. Once certified, investors can create a Qualified Opportunity Fund to invest in a census tract. A Qualified Opportunity Fund is required by the IRS to hold at least 90% of its assets in the Qualifying Opportunity Zone.
At the start of the process, a taxpayer sells an asset and generates a capital gain. This capital gain is then invested into a Qualified Opportunity Fund (QOF), which results in significant tax benefits:
- Once invested, capital gains tax on the original investment is deferred until the asset is disposed, or until 2026.
- If an investor hold their funds in the QOF for five years, their tax bill on realized gains will be reduced by 10%.
- If an investor holds their funds in the QOF for seven years, their tax bill on realized gains will be reduced by 15%.
- If an investor holds their fund in the QOF for 10 years, they are not required to pay any taxes on realized gains.
The City of Moreno Valley, in Riverside County, Southern California, has three designated Opportunity Zones. Some quick stats about the Moreno Valley Opportunity Zones include:
- Total population: 29,679
- Percent Hispanic: 61.4%
- Percent Non-Hispanic: 38.6%
- Median Household Income: $51,341
- Median Age: 28.3
- Number of businesses within OZ boundaries: More than 1,000
Investment prospects within Moreno Valley’s Opportunity Zones are plentiful, including commercial, office, medical and residential.