The 2017 Tax Cuts and Jobs Act created opportunity zones, designated areas deemed “distressed communities” where taxes on capital gains for qualified investments can be deferred to the end of 2026.
Most opportunity zone activity is in real estate, according to Mike Malody, senior tax manager at Denver-based accounting firm ACM.
“The basics of the benefit are that someone who has a capital gain,” Malody explained, has “180 days to place capital gains into an opportunity zone investment in order to defer capital gains.”
However, “the deferral itself is not ultimately the biggest significant portion of the incentive,” he noted. Gains on investments held for more than 10 years are not subject to taxation, he said.
For builders, who are not building homes and sitting on them for a decade, the advantage to the program may be in where they do most of their work.
“If you operate your business in an opportunity zone and you do a lot of work in opportunity zones, it does make sense to look into whether or not your business qualifies as a qualified opportunity zone business,” he said. “The regulations on what does and does not qualify are voluminous, but taxpayer friendly. If you have a lot of man hours in these locations or generally produce a lot of economic activity in these regions, it may be worth exploring whether or not your home building operation qualifies.”
There are a few different ways to qualify, Malody said, the most significant being “having economic activity in the opportunity zone.”
It might not be enough to just have your headquarters in an opportunity zone, though. Builders who are based in a qualified zone but “virtually all their employees and all their economic activities happen outside opportunity zones, they’re going to struggle a little bit more to qualify,” he explained. “What they want is employment, and obviously capital improvements, to happen in opportunity zones. That’s the stated intent.”
There are 126 opportunity zones throughout Colorado, largely in rural and mountain communities. Zones are designated by Census tract number.
Even if builders don’t directly benefit from deferred capital gains afforded by the opportunity zone program, they do stand to gain from increased building activity as developers and real estate investors hurry to take action.
Taxpayers can invest in qualified opportunity zone funds (QOFs), which channel resources to opportunity zones. Those QOFs must be organized as either a corporation or partnership, and must hold at least 90% of their assets in opportunity zone property or businesses.
“How we’re seeing virtually all of these funds and businesses set up is the fund itself as a separate partnership, composed of all the people who want to defer gains, and they invest in what’s known as a qualified opportunity zone business,” Malody said.
That business has to have 70% of the fund’s assets invested in it to be a qualified opportunity zone business.
“If you have a business investment, where 70% of the property or the investable assets are in a qualified opportunity zone property within that business, then it qualifies,” he said.