Wednesday, April 15, 2020

Redevelop Your Opportunity Zone

 NOTE: Within one hour of the below original post, the IRS announced an extension for Opportunity Zone (along with 1031 Exchange) investors, which eases or removes the concerns addressed below.

There are more than enough challenges for real estate investors under the current circumstances. However, those who have invested in Opportunity Zones could be facing a separate set of serious challenges.

Although this is not legal advice, which yours truly is not authorized to provide here, if you are an Opportunity Zones investor or represent one or more, there are matters to look into as soon as possible.

The I R S has, understandably, relaxed tax filing and payment deadlines from the usual April 15th until July 15th for 2020. Even in doing so, they appear to have failed to address deadline requirements as they related to active Opportunity Zone investments.

To recap, an investor had until December 31st of 2019 to invest capital gains into an Opportunity Zone fund. As a result, the investor was given a 180 day window to reinvest in a specific property or properties located within a specified Opportunity Zone.

Each Opportunity Zone is a low income community in need of redevelopment and improvements to real estate. An investor can invest locally or in any Opportunity Zone around the country without restriction, and whether developing or improving one or more existing properties.

Upon the funds being held for five years, the IRS forgives 10% of capital gains on the prior investment. After seven years, until December 31st 2026, the benefit increases to a 15% tax benefit. Thus, in the event of a $1,000,000 investment held for seven years, the tax savings would amount to $150,000.

Briefly, deadlines were put into place in order to provide benefits to investors as well as the needed economic development for the designated communities around the country.

Meanwhile, there are already several major consequences from the pandemic, the first of which are the government delays in approval of various construction plans related to properties and development within Opportunity Zones.

At the same time, government and construction entities are in a battle over essential and non-essential construction and whether or not it is safe for union workers to perform their duties on active projects.

Furthermore, banks and other lenders are faced with challenges in providing originally promised financing, whether due to financial or logistical reasons.

For example, appraisers are often unable to visit a property location to produce analysis needed for loan approval regardless of the bank or lender’s revised financial status.

These factors are only part of the problem, as the fact is that, as of press time, the IRS has yet to specifically address the impact of all of this on investing in Opportunity Zones.

Consequently, a number of possibilities may exist. Investor deadlines could easily be missed due to problems with financing and/or construction. Investors could need to pull out from their Opportunity Zone funds, even with facing a penalty and heavier tax consequences, due to needing their funds in order to operate or meet payroll.

It is possible that some communities designated as Opportunity Zones could be moving along faster than others, which could unjustly favor investors who chose that community for other reasons.

With all of this, there are potential additional complications. In the event that some or all of the designated Opportunity Zone communities around the country are or were designated as a federal disaster area, such areas would be under a different tax standard.

Again, through circumstances beyond an investor’s control, some investors could face a different or additional set of legal and tax concerns.

Until or unless there is clarification from the IRS, or a direct revision or extension of the 180 day Opportunity Zone window is announced, investors are faced with this series of questions and challenges.

Again, this is not intended to be legal advice, which we cannot provide. Having said that, the suggestion is for Opportunity Zone participants to seek legal counsel sooner rather than later. You want to be in the best possible position to defend your investment due to these unforeseen circumstances.

We suggest doing so – while you have the opportunity.

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