If you invest in commercial real estate, there’s a high likelihood you’ve heard of something called “opportunity zones.” Opportunity zones in New York are worthwhile investments meant to incentivize wealthy developers or investors to put their money into low income communities in an effort to revitalize the economy in those areas. Opportunity zones exist in Upstate New York, as well as New York City. Whether you’re looking to increase your wealth without worrying about the tax burden, or you’re interested in being of service to your community by developing affordable housing, opportunity zones in New York are a fantastic place to start.
Opportunity zones are low-income communities in municipalities that offer tax incentives to real estate investors and developers for investing in them. According to the IRS, opportunity zones were created “to spur economic growth and job creation in low-income communities while providing tax benefits to investors.” The Opportunity Zone Program, or OZ Program, was first established under the Tax Cuts and Jobs Act of 2017, in which thousands of low-income communities around the country were chosen as “Qualified Opportunity Zones (QOZs).” Taxpayers were then able to invest in those zones through “Qualified Opportunity Funds (QOFs).”
New York State has 514 opportunity zones, intended to encourage individuals and businesses to invest in real estate in low-income communities around the state. In New York, an area qualifies as an opportunity zone if the individual poverty rate is at least 20%, and the median family income is no more than 80% of the area median. The opportunity zone program, though, is not specific to New York. Opportunity zones are a federal program, said Paula Crespo, a Senior Planner at the Pratt Center for Community Development.
For many investors, Crespo explained, the opportunity zones program is “a way for people to push off their capital gains taxes by instead investing in economically distressed communities.” With the New York program, individual and corporate taxpayers are allowed to defer capital gains taxes by investing in Qualified Opportunity Funds. Additionally, appreciation of gains invested in an Opportunity Fund are exempt from federal capital gains taxes.
To access the tax benefits of an opportunity zone in New York, an investor has to invest in a Qualified Opportunity Fund that holds at least 90% of its assets in Qualified Opportunity Zone property. Taxpayers who do this can temporarily defer capital gains that are reinvested in a Qualified Opportunity Fund on their taxes. They can also permanently exclude capital gains from the sale or exchange of an investment in a Qualified Opportunity Fund that is held for more than 10 years.
For instance, let’s say an individual or corporation in New York sells an asset and realizes $100,000 in capital gains, then in that same year reinvests that $100,000 in a Qualified Opportunity Fund. Then, the individual or corporation keeps that investment for 10 years, at which point they liquidate their investment for $150,000, creating an additional $50,000 in capital gains. In this example, the individual or corporation can defer taxation on the original gain and fully exclude taxation on any appreciation of the investment in the Qualified Opportunity Fund.
If you’re a real estate developer, it’s best to go to the source to find opportunity zones in New York Empire State Development (ESD), a branch of New York State’s government, has a helpful list of the 514 approved and designated census tracts.
If you’re interested in investing in the heart of the state, New York City, check out the Citizens Housing Planning Council’s (CHPC) interactive opportunity zones map. New York City’s designated opportunity zones include 306 census tracts across the five boroughs. They are overwhelmingly residential and subject to regulation for affordability.
According to Crespo, “large, wealthy investors are the main beneficiaries of the program.” “The goal of the program,” Crespo added, “is to pump investment and pump money into economically distressed communities. And therefore, these investors are creating new housing, new businesses and new jobs.” However, from a community planning perspective, Crespo asked, “How is creating new luxury housing in economically distressed areas supposed to help low income people?” In theory, Crespo said, new jobs begin to open up for low income residents, but oftentimes, people from outside the community are hired, leaving low income residents still out of a job.
“One of the fundamental problems is that it’s hard to make money off of affordable housing,” Crespo said. Therefore, most of the new developments in opportunity zones are luxury housing, which is unaffordable to residents of those communities. So for investors, opportunity zones might be worthwhile investments to stave off capital gains taxes, but for the low-income community itself, it still remains to be seen whether opportunity zones are worthwhile. Nonetheless, this informative report presented by the Citizen’s Budget Commission (CBC) demonstrates that the OZ program strives to be transparent and requests feedback from the communities impacted so it can better serve its purpose: to encourage the economic development of low-income communities.
If you’re looking to invest in opportunity zones that make a difference, read about inclusionary zoning, another type of incentivized zoning regulation.
For investors, opportunity zones come with a number of tax benefits. From an investment standpoint, they are definitely worth putting money into. However, it’s always a good idea to research the community impact of your real estate development to ensure low-income residents will benefit from the program as well, whether that means more jobs, more housing or simply more economic growth for the area.
