Current Economic Condition Of California
The state of California is responsible for 14.1 percent of the gross domestic product in the United States That type of production leads all states and there has also been a 2.7 percent increase in 2018. That is expected to continue to increase over the next few years. Meanwhile, the unemployment rate continues to decrease as it is at 4.8 percent and trending downward. The creation of new jobs are taking place in administrative and support services along with health care and social assistance.
The economy of California ranks fifth in the world and that is just in front of Great Britain. However, not everything is as stellar as it sounds. There is difficulty when it comes to buying a home because of the high cost of living, which has caused the price of homes to escalate.
California has also rebounded from the financial crisis of almost a decade ago and since that time, the state has been responsible for 20 percent of the countrys economic growth. Unemployment is as low as its been since 2000. But a high deficit that continues to grow could lead to more hikes in income tax rates, which would surmount housing difficulties.
Tax Benefits Of Opportunity Zone Funds
This map depicts the Opportunity Zone in Downtown Bakersfield, California. All of our multifamily developments are located within the Eastchester neighborhood in this Qualified Opportunity Zone.
An investor who has realized a capital gain by selling an asset like stocks or real estate can receive special tax benefits if they reinvest that gain into an Opportunity Fund within 180 days.
There are three primary advantages to rolling over a capital gain into an Opportunity Zone Fund:
Why Invest In The Supply Chain
Ever-growing e-commerce reliance and compounding supply chain disruptions continue to create significant demand for modern industrial real estate, heavily outpacing supply. The lack of U.S. warehouse facilities is driving both rent costs and record low vacancies.
*Source: JLL Position Paper | Summer 2020
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How Investing In Opportunity Zones Works
The designation of Opportunity Zones is designed to help spur development of identified communities. In exchange for investing in Opportunity Zones, investors can access capital gains tax incentives available exclusively through the Opportunity Zone program. To access these tax benefits, investors must invest in Opportunity Zones specifically through Opportunity Funds. A qualified Opportunity Fund is a US partnership or corporation that intends to invest at least 90% of its holdings in one or more qualified Opportunity Zones. As previously mentioned, Opportunity Funds are governed by IRC section 1400Z-2 and Opportunity Funds can self-certify to the IRS. But each Opportunity Fund is responsible for ensuring that they abide by the guidelines of the Opportunity Program in order to be able to offer tax incentives.
Because the Opportunity Zone program is intended to stimulate positive growth within designated communities, there are restrictions on the types of investments in which an Opportunity Fund can invest. These investments are called Qualified Opportunity Zone property, which is defined as any one of the following:
- Partnership interests in businesses that operate in a qualified Opportunity Zone.
- Stock ownership in businesses that conduct most or all of their operations within a qualified Opportunity Zone.
- Property such as real estate located within a qualified Opportunity Zone.
What Is A Qualified Opportunity Zone Investment Fund
The Tax Cuts and Jobs Act of 2017 created QOZs to provide potentially significant tax benefits to investors who re-invest capital gains into long-term investments into communities designated for economic development.
This solution is useful for accredited investors who have substantial capital gains, a desire to realize them in a tax-efficient manner, and a commitment to socially-impactful investments.
Qualified Opportunity Zone Business Property
QOZ business property is tangible property that a QOF acquired by purchase after 2017 and uses in a trade or business and:
- The original use of the property in the QOZ commenced with the QOF or QOZ business
the property was substantially improved by the QOF or QOZ business and
- During 90% of the time the QOF or QOZ business held the property, substantially all of the use of the property was in a QOZ.
Leased property may also qualify as QOZ business property. To qualify, the lease must be a market rate lease entered into after December 31, 2017. If the parties to the lease are related parties, the lease must be a market rate lease entered into after December 31, 2017, there must be no prepayment in connection with the lease that exceeds 12 months, and if the leased property had previously been used in the QOZ, then the business must purchase new tangible property to use in the QOZ equal in value to the leased property.
California Recycle Underutilized Sites Program Offers Public Financing For Brownfield Sites
The California Recycle Underutilized Sites program offers public financing to help remediate and redevelop brownfield sites to help create housing and encourage other types of community development. The program has led to $3.7 billion of private and public housing investments, and the development of over 7,200 housing units, including approximately 3,600 affordable units. To do this, CALReUSE provides forgivable loans and grants, which can help fund both remediation and construction costs for development projects. Since many of these brownfield sites are located in Qualified Opportunity Zones , the program could easily help Opportunity Funds redevelop these sites to create profitable developments with a high level of community impact.
The Basics: Opportunity Zones Qualified Opportunity Funds And Qualified Opportunity Zone Businesses
The TCJA allowed governors to nominate census tracts for OZ designation following certain federal criteria. To qualify, census tracts must generally be low-income communities, defined as having a poverty rate of at least 20% or a median family income of 80% or less of the metropolitan area or state median family income. States were also permitted to select a limited number of contiguous tracts that are not low-income communities but border a qualified low-income community and have a median family income that does not exceed 125% of that of the adjacent qualified low-income tract. Contiguous tracts may not comprise more than 5% of a states total selected OZs. Each state was permitted to nominate a total number of OZs not exceeding one-quarter of all eligible low-income tracts. In California, Governor Jerry Browns administration nominated 879 census tracts to become OZs, and the US Treasury Department certified all of them. One-tenth of Californias population , nearly 4.2 million residents, live in OZ census tracts. These designations will remain in effect for 10 years.
Calculating The Tax Benefit Of An Opportunity Zone Investment
In the example above, investing the $500,000 capital gain from the traditional asset in a qualified opportunity zone would allow the investor to defer and reduce the $119,000 tax owed. The investor could potentially earn additional capital gains tax-free, depending on how long the opportunity zone investment is held.
Investments held at least five years receive a cost basis step-up equal to 10% of the capital gain
Investments held at least seven years receive an additional basis step-up equal to 5% of the capital gain and
Capital gains from the opportunity zone investment are tax free if the investment is held at least 10 years.
The table below illustrates the tax benefits of investing proceeds from the sale of a traditional asset in an opportunity zone.
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Qualified Opportunity Zone Business
Each taxable year, a QOZ business must earn at least 50% of its gross income from business activities within a QOZ. The regulations provide three safe harbors that a business may use to meet this test. These safe harbors take into account any of the following:
- Whether at least half of the aggregate hours of services received by the business were performed in a QOZ
- Whether at least half of the aggregate amounts that the business paid for services were for services performed in a QOZ or
- Whether necessary tangible property and necessary business functions to earn the income were located in a QOZ.
What States Don’t Conform With Qoz Tax Benefits
One of the highlights of the 2017 Federal Tax Cuts and Jobs Act is the Qualified Opportunity Zone program that gives taxpayers the ability to defer and potentially eliminate certain capital gains. Effective starting in 2018, the program is available for a limited window of time, and only provides incentives throughout a ten-year tax deferral period. To continue learning about the program, take a look at the timeline below, or read more here.
Just like with any amendment to the Internal Revenue Code , it is important to understand whether states will conform to that change. Most states have implemented the changes made by the TCJA, and since those states tend to start their computation of the income tax base with either federal taxable income or federal adjusted gross income , the federal QOZ tax benefits will be incorporated for state income tax purposes as well.
Investors should note that this is not true for all states, and below we have identified some examples of states that do not fully conform to the federal QOZ tax benefits. Unless otherwise noted, these rules apply to both corporations and individuals.
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Los Angeles: Dtla The Arts District And Koreatown
Downtown LA , and in particular, the LA Arts District, is one of the fastest growing urban areas in Los Angeles County, which itself is third-largest metropolitan economy in the world, with a gross domestic product of nearly three quarters of a trillion dollars per year. Much of DTLA is located within Opportunity Zones, providing a promising opportunity for investors looking to enter the market.
In addition to Downtown LA, Koreatown is another fast-growing neighborhood in Los Angeles, nearly all of which is inside a QOZ. From 2012 to 2019, residential real estate prices in the area nearly doubled, with the average home value jumping from $333,000 to $637,000, which has greatly increased demand for multifamily rentals, as many individuals and families are priced out of homeownership.
San Francisco Bay Area: Oakland, Cupertino and San Jose
While San Francisco itself is mostly excluded from Opportunity Zones due to its incredibly high incomes, several nearby cities, including Oakland, Cupertino, and San Jose are host to multiple QOZs. Oakland itself is a particularly promising investment area, as home values have increased nearly 240% since 2012, going from $309,000 to $734,000. Much like Koreatown in Los Angeles, this is increasing demand for multifamily rentals, as well as the demand for commercial real estate in the area.
Benefits Of Investing In Opportunity Zones
Opportunity Zones offer tax benefits to investors who elect to temporarily defer tax on capital gains if they timely invest those gain amounts in a Qualified Opportunity Fund . Investors can defer tax on the invested gain amounts until there is an event that reduces or terminates the qualifying investment in the QOF , or December 31, 2026, whichever is earlier.
The length of time the taxpayer holds the QOF investment determines the tax benefits they receive.
- If the investor holds the QOF investment for at least five years, the basis of the QOF investment increases to 10% of the deferred gain.
- If the investor holds the QOF investment for at least seven years, the basis of the QOF investment increases to 15% of the deferred gain.
- If the investor holds the investment in the QOF for at least 10 years, the investor is eligible to elect to adjust the basis of the QOF investment to its fair market value on the date that the QOF investment is sold or exchanged.
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Additional State Financing Programs Provide Additional Incentives For California Opportunity Zone Investors
In addition to the standard benefits of the Opportunity Zones program, several California state government programs provide additional incentives for specific types of development, which Opportunity Funds may wish to use to increase leverage and gain access to low-cost commercial real estate financing. Typically, these developments will need to undergo an application process, and must provide benefits to the public, such as affordable housing or redeveloping brownfield sites.
Opportunity Funds: I Want To Invest
How do I invest in an Opportunity Zone?
Investments in Opportunity Zones are made through Qualified Opportunity Funds. You must make your investment through a Qualified Opportunity Fund in order qualify for any benefit.
What is a Qualified Opportunity Fund?
A Qualified Opportunity Fund is any investment vehicle that files either a corporate or partnership federal income tax return and is organized for the specific purpose of investing in Opportunity Zone assets. To become a Qualified Opportunity Fund, an eligible investment vehicle must self-certify by filing IRS Form 8996 with its federal income tax return.
Where can I find a list of all the Qualified Opportunity Funds?
There currently is no complete list of all Qualified Opportunity Funds. There is also no ability to provide confirmation that an investment is in a Qualified Opportunity Zone.
Can I invest in a Qualified Opportunity Fund if I am not within an Opportunity Zone?
Yes. You can invest in a Qualified Opportunity Fund if you do not work, live or own property within an Opportunity Zone.
What tax benefits can I receive from investing in a Qualified Opportunity Fund?
There are primarily three tax benefits made with the creation of OZs.
Can a Qualified Opportunity Fund make investments in multiple Opportunity Zones?
Yes. If the Qualified Opportunity Fund holds at least 90% of its assets in Opportunity Zone property, the fund can invest in as many qualified Opportunity Zones as it desires.
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Tax Advantages Of Investing In Opportunity Zones
In exchange for following the rules of the Opportunity Zone program and investing in Qualified Opportunity Zones through Qualified Opportunity Funds, investors can receive substantial capital gain tax incentives immediately and over the long term.
When an investor divests an appreciated asset, such as stocks or real estate, they realize a capital gain, which is a taxable event. Under the Opportunity Zone Program, if an investor reinvests a capital gain into an Opportunity Fund, they can defer and reduce their tax liability on that gain. Beyond that, they can also potentially receive tax-free treatment for all future appreciation earned through the fund. Together, these tax incentives can boost after-tax returns for Opportunity Fund investors:
City of Anderson1887 Howard St, Anderson CA 96007530-378-6626
California High Speed Rail Project Could Bring Visitors To Opportunity Zones
Right now, the California High-Speed Rail Authority is developing and planning a high speed rail project that will traverse the state. The 800 miles will go from San Francisco to San Diego, and many of the stops will take visitors into or close to Opportunity Zones. Understanding these plans, and co-ordinating with city governments and other Opportunity Funds could provide Opportunity Fund managers the ability to make smarter investment choices and increase profits, while helping create more sustainable community development.
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Opportunity Zones Structurally Favor High Returns Not Community Benefits
Opportunity zones have fewer limits on the range of qualifying investments and fewer safeguards to prevent abuse and revenue loss than other tax-based programs designed to promote community and economic development, such as the New Markets Tax Credit and the Low-Income Housing Tax Credit programs. Whats more, regulations issued by the Trump administration broadened the intent of the original law and created opportunities for abuse. As a result of lenient regulations, for example, investors can claim a full tax break even if only 63 percent of the capital in an opportunity fund is actually invested in an opportunity zone. Moreover, the original law includes no requirements that opportunity zone residents actually benefit from investments.
Opportunity zones singular focus on reducing taxes owed on capital gains structurally favors projects that generate high returns, rather than the greatest social impact.
Sage Equities Is Pioneering Opportunity Zone Investments In Bakersfield California
All of our multifamily developments are located within Qualified Opportunity Zones, which allows us to offer significant tax benefits to our investors. A central feature of the federal program is the revitalization of communities through the creation of social and economic opportunity. At Sage, we are doing just that working to redevelop the Eastchester neighborhood in Downtown Bakersfield through high-quality, recession-resilient residential projects.
With this program, investors who hold capital gains due to recent capital events, such as an inheritance or the divesting of a stock, property or a business, can both defer and reduce their tax liability by reinvesting their capital gains in a new type of investment vehicle called an Opportunity Zone Fund.
Additional Evidence Also Points To Lack Of Impact
The new study builds off prior research that finds minimal to no impact resulting from opportunity zone designation. Taken as a whole, research to date suggests that opportunity zone tax breaks have largely benefited areas already experiencing development, projects that would have occurred in the absence of an incentive, and/or projectssuch as self-storage facilities and bitcoin mining facilitiesthat do little to create employment and economic activity in surrounding communities. Notably, the evidence includes: