When the Tax Cuts and Jobs Act became law in late 2017, it was called the most sweeping rewrite of U.S. tax laws in 30 years—with good reason. In addition to major rate cuts and changes to both personal and business deductions, the law also launched a new program that could have a significant direct impact on the real estate and construction industries.
The new program—the Opportunity Zone Tax Initiative—is designed to spur development in economically distressed areas by creating new tax incentives for long-term investment. In addition to encouraging building and development (which is always a welcome prospect for the construction industry), the program also offers construction business owners and other investors some potentially attractive tax benefits.
How It Works
The new program allows you to defer taxes on capital gains from the sale of assets such as stocks, real estate, businesses, or other investments, provided you reinvest those gains into a qualified opportunity zone fund within 180 days. When you do this, you can benefit in three ways:
1) You can defer taxes on the capital gains from your original investment until Dec. 31, 2026 or until you sell the new opportunity zone fund investment, whichever comes first.
2) If you hold the opportunity zone fund investment for five years, 10 percent of your gains on the original investment will be exempt from taxes. If you hold the investment for seven years, an additional 5 percent of the gains will be exempt.
3) If you hold the opportunity zone fund investment for 10 years, the cost basis of the fund will be adjusted to match the fair market value at the time you sell it—in effect, any appreciation in the fund’s value could be exempt from capital gains tax.
Investors who are eligible to participate in opportunity zone funds include individuals, partnerships, corporations, LLCs, REITs, and estates and trusts.
Impact on Real Estate and Construction
To qualify for these incentives, you must invest through a qualified opportunity zone fund, which can be either a partnership or corporation. This fund must invest at least 90 percent of its assets into income-producing properties located within one or more of the 8,700 recognized opportunity zones that were nominated by state governors and certified by the Treasury Department last year.
The tax benefits derived from forming a qualified opportunity zone fund could encourage real estate developers to launch new projects—with potential benefits for contractors as well. However, certain types of properties are specifically excluded from the program. These include golf courses, country clubs, racetrack or gambling facilities, massage parlors, and liquor stores.
Rather than forming their own opportunity zone funds, many investors are likely to invest in one of the numerous new funds that developers, commercial real estate brokers, and economic development agencies have already established.