Practical Pointers from Practitioners

Worth a Second Look: Opportunity Zone Literacy in Real Estate Transactions

“Opportunity zone” has been a buzzword in real estate since late 2017 when Congress passed the Tax Cuts and Jobs Act, yet many real estate attorneys do not consider opportunity zones to be a regular part of their analysis in advising clients on real estate transactions. Basic literacy in opportunity zones can add value for clients in site selection and finance acquisition, without requiring attorneys to be experts on the topic. (Of course, tax and corporate expertise should be sought for the formation of the legal vehicles and reporting or certification requirements involved in such transactions.)

As an overview, the opportunity zone tax regulatory scheme aims to incentivize private investment of capital gains into businesses in low-income communities in exchange for tax perks— specifically, deferrals, reductions, and even forgiveness of certain qualifying capital gains taxes. Whether a business is located in an opportunity zone depends entirely on each state’s governor’s selection, based on a litany of community development-related criteria. Nationally, there are 8,700 opportunity zones open for investment. As of June 30, 2021, three and a half years into the program’s existence, Novogradac estimated that investors have directed over $17.52 billion from capital gains into “Qualified Opportunity Funds” (QOFs), the legal vehicles for unrealized capital gains to be invested into qualifying businesses located in opportunity zones or “Qualified Opportunity Zone Businesses.” Interestingly, close to 80 percent of all QOFs formed to date focus on residential

Despite the buzz and obvious tax incentives for clients involved in opportunity zone investments, many real estate practitioners have been hesitant to wade into the world of opportunity zones or at least have not taken affirmative steps to broach the topic with clients in instances where such advice is unsolicited. Perhaps some practitioners are waiting to see if the IRS will extend current investment deadlines, thereby opening a window for latecomers to join the fray. Others may deem the organizational structure and tax acumen required to set up QOFs to be outside their comfort zones. Hesitations aside, basic literacy in this field should be normalized among real estate attorneys in light of the clear and continuing benefits that can accrue to clients by adding an opportunity zone layer to already viable deals over the next six years (unless current deadlines are further extended).

To illustrate the volume of potential, as of 2017, an estimated $6.1 trillion in unrealized capital gains were being held by both individual households and US corporations (based on the Federal Reserve’s Survey of Consumer Finances and Financial Accounts). These potential sources of funding were previously untapped and locked up in capital markets due to high capital gains taxes that would result to investors upon disposition of appreciated assets. As of this writing, December 31, 2021, is the deadline for investors to reap the tax benefits of one of the primary components of opportunity zones, 10 percent forgiveness (a 10 percent step-up in basis) on original capital gains invested into QOFs. This deadline stems from the current requirement that gains be invested and held in QOFs for at least five years prior to December 31, 2026. Though this fastapproaching deadline may arrive too soon for many practitioners to integrate an opportunity zone component in deals closing before the end of 2021, the program still offers significant benefits for capital gains invested in QOFs before June 28, 2027, and held for ten years, offering a 100 percent step-up in basis at the time of sale of the opportunity zone investment (meaning no capital gains tax on new gains from the investment).

At the most basic level, real estate attorneys can advise clients on site selection and alert clients to the locations of opportunity zones within their states. In Louisiana, for example, there are 150 opportunity zones, with over two dozen checkerboarding across Orleans Parish. Large swaths of downtown New Orleans constitute opportunity zones, and the distinction between one block of real estate from another could mean a substantial difference in tax outcomes for investor clients.

Attorneys can also direct clients to the relevant economic development councils in their state for further advice on site selection in opportunity zones. Municipalities with economic development councils are in constant competition for businesses to develop in their particular jurisdictions and can assist clients in finding investors or even direct clients toward local tax breaks and public funding sources such as community development block grants, which can further increase project budgets and community impact.

Opportunity zones will continue to be a very real consideration for investors for at least the next six years. It’s not too late for practitioners to familiarize themselves with the basics and add value for their clients.

Contributing Author: Chelsea Fitzgerald, Coats Rose, P.C., One Canal Place, 365 Canal Street, Suite 800, New Orleans, Louisiana 70130, CFitzgerald@coatsrose.com.

Published in Probate & Property, Volume 36, No 1 © 2022 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.