Developers can reap multiple rewards from Opportunity Zones. The advantages come in three forms: significant tax savings, effective capital raising, and strategic marketing leases. The primary allure is the substantial tax savings; when a developer has capital gains, they can invest directly into a Qualified Opportunity (QO) Fund in a relevant project. By doing so, they can tap into the full range of tax benefits that Opportunity Zones offer, maximizing their investment.
Developers with capital gains can utilize a qualified opportunity zone fund (QOZF) to defer taxes on those gains and possibly reduce their total tax liability.
There is no cap on the amount of capital gains that investors can defer. There are two conditions for deferring taxes on gains. The earlier of:
A.) Until December 31, 2026.
B.) The sale or exchange of the OZF investment.
Developers who hold their gains in the fund longer term will reap additional benefits by reducing the deferred gain.
5 years — 10% reduction
7 years — 15% reduction
10 years — investment basis increased to its fair market value
By holding longer term, gains are deferred multiple years and then reduced permanently. For those that hold for 10 years, their gains are nulled as no taxes will be owed.
Developers who set up a QOZF can provide the above benefits to potential investors. Investors seeking tax benefits on gains can invest in a developer’s QOZF, which will help developers looking to raise capital for their opportunity zone projects.
Setting up a QOZF requires effort, but for motivated developers who want to raise additional funds, it can be a great way to meet that goal.
Developers have the ability to invest directly in existing qualified opportunity zone businesses (QOZB) or create their own. These are businesses located or being built within an opportunity zone.
Creating a qualified opportunity zone business does require quite a bit of work. The qualification process isn’t a one-off; it requires time. This is because some requirements, such as the income requirement, are proven over several years. But the same tax benefits apply.
Being a middleman between investors and QOZBs, developers may have more insight into both sides of the transaction. This provides them with a unique perspective when it comes to opportunity zone investments.