Since the federal government created the concept of “opportunity zones” in 2017, many low-income areas around the country have received significant investment. While we’ll delve into the specifics of opportunity zones below, they’re essentially tax breaks for investors who want to work in undeveloped areas. Real estate agents in Florida can capitalize on this, as 427 low-income areas in the state have been included in the program. Since the program was introduced by the Tax Cuts and Jobs Act of 2017, investors have become more open to investing in these areas for various reasons.
If you strategically guide investors to the right properties in these areas, you can also benefit from the increased demand. Ultimately, you’ll also help the local economy, which is always a plus. However, you must also understand these incentives in-depth and know the hottest neighborhoods in OZs to make the most of them. Let’s break it down!
What Are Opportunity Zones?
Opportunity zones were created in 2017 as a part of the above-mentioned Tax Cuts and Jobs Act. The program helps investors who would otherwise be paying capital gains tax to defer payment. Instead, they can invest the gains they’d be paying taxes on as equity in an opportunity zone.
Luckily for real estate agents in Florida, these investments are generally used for real estate development in low-income areas. Back when the law was enacted, states could choose a quarter of their low-income areas (determined by the census). These were then designated as opportunity zones where real estate investors became eligible for the tax break.
How To Identify The Right Opportunity Zones
There are 427 opportunity zones in Florida, providing potential investors with plenty of opportunities. Plus, the law that created OZs stipulated that these zones, once determined, would become fixed — so there’s no danger of the zones changing or shifting.
This is only logical, as the whole point of this was to increase long-term investments in underdeveloped areas. Usually, investors participate by investing in Qualified Opportunity Funds. The investors pool funds into an investment to eliminate their taxes from previously sold assets.
To choose the right OZ to recommend to investors, you want an area already showing some economic potential. However, while it’s on the upswing, your perfect area should still be in the early stages of its renaissance — after all, it was included in the OZ list for a reason.
Generally, there are a lot of factors you can use to determine the right zone. For instance, you could partner with a local moving company to learn about the latest relocation trends. For instance, Coastal Van Lines Florida is a prime example of professional movers with plenty of local knowledge. They could point you toward OZ areas where people have already begun moving — indicating that real estate prices may rise soon.
How Do Opportunity Zones Work?
There are a few crucial tax incentives in the program.
First, investors can defer paying capital gains taxes by reinvesting the money into opportunity zones, as mentioned above. This continues until you sell the investment or until the start of 2027.
However, that’s not all. If they hold the investment for a minimum of 5 years, the initial capital gains tax is reduced by 10 percent. And if they hold it for seven years, they get a total of 15% off.
Finally, the investor can avoid paying the tax indefinitely by holding the investment for at least 10 years. As a result, if the value of the opportunity zone appreciates in the meantime, investors can save a lot of money on tax. And with real estate investments, this is almost a given — especially with the increased economic development in these previously rundown areas.
Which Properties Are Ideal?
Besides choosing the right OZ, you need to be able to pick the right property to recommend to investors as well. When choosing a specific OZ, you need some macroeconomic knowledge and an understanding of the migration trends in America — but when it comes to picking properties, you need good old-fashioned local real estate knowledge.
After all, investors will have to hold these investments on their books for a while — so they should expect a return in terms of higher property prices.
As a result, focus on housing or commercial properties with growth potential. In these underdeveloped areas, you could also find affordable mixed-use properties that could turn out to be profitable in the long run. Of course, you should also seek out properties near existing real estate development. Make sure you’re aware of any local development plans and zoning changes.
What Kind of Investors Should You Pursue?
So, what types of investors do real estate agents in Florida pursue to make use of opportunity zones?
The good news is that the lawmakers pretty much didn’t care which type of real estate projects were getting an investment — just as long as there was economic development.
In other words, investors could get tax incentives for investments in:
● Industrial real estate
● Commercial real estate
● Local OZ infrastructure
● Housing projects
● Start-up projects based in OZs
The project required that properties undergo a "substantial improvement" to meet the criteria. So, finding investors isn’t difficult if you have the right connections locally.
Federal Requirements
Compared with other federal tax deferments, there were few to no eligibility requirements for opportunity zones.
So, investors don’t have to rent housing to low-income individuals, and no requirement limits them to only receive the tax cut when private financing is unavailable.
Most of these investments were used to fund real estate projects. Federal data shows that construction and real estate businesses received over two-thirds of the granted tax deferments.
Bear in mind that you could be chasing out-of-state investors as well — they don’t necessarily have to be from Florida. By all accounts, investors usually fund most OZ projects from the following seven states:
● Colorado
● Nevada
● Connecticut
● Utah
● New Jersey
● New York
● California
Wrapping Up
With the right approach, real estate agents in Florida can earn quite a lot from opportunity zones in America. However, you will need to choose the OZs to focus on wisely and steer potential investors to the right properties.
Author Info: Jordan Mitchell, MoveSafe Relocation