Do you hear that knocking? Is it an Opportunity…Zone?
Opportunity Zones are plentiful in the United States. They don’t have anything to do with zoning permits, though you’ll still need them if you plan to develop. When it comes to CRE investing, Opportunity Zones feature unique benefits that can deliver exceptional returns. Opportunity Zones exist in practically every state, but Florida is one where they are especially booming. Here, we’ll dive into what an opportunity zone is, the benefits of Florida Opportunity Zones, how to find them and more.
Similar to inclusionary zoning, an Opportunity Zone is an economically distressed community that has seen little to no investment in many years. Each state nominated low-income areas as defined by census tracts to be designated as an Opportunity Zone. Neighboring areas could sometimes also quality to be in an Opportunity Zone.
Created by the Investing in Opportunity Act section of the Tax Cuts and Jobs Act of 2017, Opportunity Zones were designed to incentivize investment in low-income communities. A Qualified Opportunity Zone must meet one or more of the criteria the IRS defines below.
States are permitted to designate up to 5% of their Opportunity Zones to communities that are not low-income. These areas are classified as Contiguous Non-LIC (Low Income Community) census tracts and meet one of the following critieria.
If you’re a seasoned commercial real estate investor, you shouldn’t have much trouble qualifying for the Opportunity Zone Program. The Tax Cuts and Jobs Act of 2017 requires investors to operate through a Qualified Opportunity Fund. A Qualified Opportunity Fund is how corporations and partnerships manage funds and enjoy the tax benefits of developing in an Opportunity Zone.
CRE investors can contribute to existing Qualified Opportunity Funds, or they can set up their own. Either way, in order to be eligible for the full tax benefits, investors must contribute realized capital gains into the Qualified Opportunity Fund. Any corporation or partnership can set up a Qualified Opportunity Fund as long as they meet the requirements below:
To set up a Qualified Opportunity fund, fill out and return form 8996 to the IRS.
In general, the benefit of investing in an Opportunity Zone is the deferment of capital gains tax. However, for investors, there is both good news and bad news.
If you were to invest in an Opportunity Zone tomorrow, you could still transfer 100% of the capital gains from a prior investment within 180 days of the sale date. You can defer payment of capital gains taxes until the fund is sold or until December 31, 2026, whichever comes first. Another benefit all investors can enjoy now is that Opportunity Zone tax benefits could potentially coincide with the Low Income Housing Tax Credit (LIHTC). If you can partner with a developer with LIHTC credits (since there are limited numbers in each state), you can add dollar-for-dollar income tax credit on top of the Opportunity Zone benefits.
Since the legislation was passed in 2017, the deadlines to qualify for additional capital gains write-offs (5,10, and 15 percent, respectively, based on the length of time the investment was held) have passed.
The primary benefit of investing in an Opportunity Zone in Florida is that people continue to migrate to the state in droves due to its low unemployment rate, lack of state income tax and retirement opportunities. That means many of the Opportunity Zones in Florida are poised for development booms, despite being low-income communities. CRE investors can take advantage of the tax benefits of an Opportunity Zone until 2027 and also continue to see a significant ROI on their property far into the future.
Finding opportunity zones in Florida is a matter of a simple internet search: you can go to the Opportunity Zones Database for a complete listing.
CRE common sense dictates that when investing in any area, you want to be where the people are; Opportunity Zones are no different. However, just because it’s Florida doesn’t mean you can pick a random county and expect it to be a great location. Even highly populated counties in Florida have large swaths of sparsely populated low-income areas. Below are four of the most lucrative Opportunity Zones in the state.
While it doesn’t have the most Opportunity Zones in Florida (26), Orange County is home to Orlando, which is quickly becoming a single sprawling metropolis of Central Florida. The job market is good, between Disney and a vast retirement population. It’s also in the center of the state, making it a destination, or pitstop, for commuters.
Home to Tampa, St. Petersburg and Clearwater, Hillsborough County is one of the most desirable places in the country to live. Couple that with 32 designated Opportunity Zones, and it’s an excellent place to invest.
With 68 Opportunity Zones and the most populous county in the state by far (over 2.5 million people), you can’t go wrong with setting up shop here. Since Miami/Dade is an attractive workplace destination, developers can also reap the benefits of density bonuses here.
Palm Beach county is home to some of the most desirable (and expensive) properties in the nation. That’s why many people overlook it as an excellent place to invest in an Opportunity Zone. However, the county has 26 dedicated Opportunity Zones, making it an attractive CRE investment area.
While the time has passed to receive the maximum tax benefits with Opportunity Zones, CRE investors looking to defer capital gains still have an excellent opportunity to do so. Florida Opportunity Zones have the added appeal of constant population growth. So, holding onto an investment property after the legislation expires might generate continued strong returns, especially if you’re able to tie in some Low Income Housing Tax Credits.
