“Keep Portland Weird.” The popular slogan appears on bumper stickers, signs, and public buildings throughout Portland.
It could also impact your investment portfolio.
A 2017 tax provision created more than 8,700 Opportunity Zones across the country that offer tax advantages to attract investment to economically distressed communities.
But Oregon did something “weird”: It selected downtown Portland as an Opportunity Zone, including established and bustling neighborhoods, such as the Pearl District and Central Eastside.
This sounds appealing, but is investing in Opportunity Zones right for everyone?
Opportunity Zone Investment Basics
To take full advantage of a qualified Opportunity Zone investment, an individual or business must sell a capital asset and realize a gain.
If reinvested in a Qualified Opportunity Zone Fund (QOF) within 180 days of a sale, the gain can be deferred.
To receive all potential tax benefits, investors must invest in a QOF by December 31, 2019.
After 5 years, investors receive a 10% discount on the original deferred gain.
After 7 years, the total discount becomes 15%. Tax on the deferred gain is due upon the sale of the QOF or on December 31, 2026, whichever comes first.
And the real kicker: After 10 years, investors can sell their QOF investment and not owe any tax on the appreciation of the underlying investment.
Why Consider Opportunity Zones?
Let’s say Sarah sold her business on January 1, 2019 for $2,000,000. Her capital gain was $1,000,000. She has 180 days to reinvest all or a portion of the $1,000,000 in a QOF to defer paying tax on the gain.
If she holds this investment for 5 years, she gets a 10% discount (for tax purposes, the $1,000,000 gain is reduced to $900,000).
After 7 years, she gets an additional 5% discount, for a total discount of 15% ($1,000,000 is reduced to $850,000).
At this point, tax on the $850,000 is due (on December 31, 2026), whether she sells or holds the QOF investment.
If Sarah holds the investment for 10+ years and then sells, there is no additional tax due on any appreciation of the QOF.
Clearly, deferring and reducing a capital gain, while benefiting from potential tax-free growth, makes QOFs attractive.
Who Should Invest in Opportunity Zones?
Investing in Opportunity Zones may be suitable if you:
- Hold a highly appreciated, concentrated position; are considering selling a business; or have other substantial unrealized gains
- Don’t have a near-term need for those gains
- Have a long time horizon and can accept the illiquidity of a 5- to 10-year real estate investment
- Have experience with private equity and/or private real estate investments
What Are the Risks?
Investing in real estate development, particularly in economically distressed neighborhoods, is not without risks.
Even in Portland.
Investors should consider the general risks associated with real estate development (rising interest rates, downturn in the property market, regulation/tax changes), as well as the illiquidity and concentration risk.
And if the current tax plan is not extended past December 31, 2026, investors would potentially be required to pay taxes on accrued capital gains after this date, regardless of hold time.
Consult with Vista
Investing in Opportunity Zones can be advantageous under the right circumstances. Please contact Vista to discuss whether this opportunity might be right for you.