This is a loaded question since there are a few questions being asked. First, can an opportunity zone (OZ) change its entire designation, and then can it change only parts of it? Let's dig deeper into what these questions mean, if they are possible, and finally, how to go about implementing the changes.
Realized recently joined the Opportunity Zones podcast for a panel on Opportunity Zone (OZ) investment strategies. The panel discussed a variety of ways that investors can seek to maximize the tax efficiency of their investments. They also compared Opportunity Zones and Delaware Statutory Trusts (DSTs) in terms of benefits and challenges for investors. Here are some of the key takeaways from this panel.
The Opportunity Zone program has been around for close to five years. Yet some questions remain about this initiative, including investment deadlines and what benefits can be realized from participation.
Like traditional real estate investment vehicles, Qualified Opportunity Zone Funds (QOZF) may strategically use financing to help maximize returns. Using debt or leverage has its pros and cons; it has the first priority of payment, it magnifies returns in both directions, and it also provides income tax shelter. All else equal, more debt offers a higher risk/return ratio for investors.
Since its introduction five years ago, the Qualified Opportunity Zone program has been described as an economic revitalization program, as well as one offering potential tax-deferral investment opportunities. But from an investment standpoint, some might question whether it’s worthwhile investing in a program that has an end date of Dec. 31, 2026.
The 26 U.S. Code § 1031 - “Exchange of real property held for productive use or investment,” aka the “1031 Exchange,” aka the “like-kind exchange” has been around for close to a century. Originally initiated as a tool to help farmers better understand land borders, the code allows investors to defer real estate capital gains taxes, by allowing them to “exchange” property into other like-kind investments. Meanwhile, the Qualified Opportunity Zone Program (QOZP) was passed as part of the Tax Cuts and Jobs Act of 2017. The program’s purpose is to encourage investment of capital gains from the sale of assets into federally designated lower-income communities.