by Ashley Tison, Founder & President – OZPros
As we look further into the future, the real estate landscape is poised for change. Prospective homebuyers and seasoned investors alike are watching mortgage rates keenly since these are likely to fluctuate throughout the year, especially considering the tumultuous real estate market we have seen over the past few years.
However, savvy real estate investors can strategically navigate markets no matter what happens to interest rates. One of the ways they do this is with programs that provide tax savings for using more equity, which is exactly what Opportunity Zones do, meaning 2024 will likely be a great year to take advantage of them.
What are Opportunity Zones?
Opportunity Zones have been around since 2017, when Congress passed the Tax Cuts and Jobs Act that created them to provide real estate investors with incentives for revitalizing marginalized communities. Toward that end, the governor of every state designated up to 25 percent of their low-income census tracts as a qualified Opportunity Zone that would benefit from development and economic stimulus. A total of 8,764 qualified opportunity zones were designated across every state, US territory, and the District of Columbia.
The Opportunity Zone program was designed to attract investment and new development into these areas to spur job creation and economic growth that will buttress the community’s prospects far into the future. To attract this investment, the government’s Opportunity Zones program offers tax advantages for those who provide the capital to revitalize these underserved areas.
The tax advantages of investing in Opportunity Zones
Deferring, decreasing, and eliminating taxes is of obvious interest to those with the capital to buy real estate and develop their own projects. It also comes in handy if you anticipate coming into a large capital gain, perhaps through the sale of a business, appreciated property, or cryptocurrency. By taking that capital gain and investing it in an Opportunity Zone, you can delay payment of the taxes for years. In addition, if you hold it for 10 years, you’ll owe no additional taxes on the investment you made in the Opportunity Zone!
In short, this means that investors can expect returns from Opportunity Zone investments that are worth approximately 25 to 30 percent more after taxes than other investments. Whether delaying, decreasing, or eliminating taxes, development projects in Opportunity Zones not only help low-income neighborhoods grow and prosper but also benefit their investors.
Taking advantage of these benefits doesn’t necessarily require having a ton of money and developing one’s own real estate in an Opportunity Zone, though. Investors can also buy into Qualified Opportunity Funds, which allow them to capitalize on existing or upcoming projects in Opportunity Zones.
Given our current economic conditions, the unique tax advantages of Opportunity Zones make particular sense in 2024.
Innovative strategies to optimize current market conditions
The economic landscape at the start of 2024 is marked by a global recovery from the challenges of the past few years. Central banks worldwide are carefully monitoring inflation, employment rates, and overall economic stability. Perhaps most importantly, inflation has slowed. As Reuters recently reported, “U.S. prices rose marginally in December, keeping the annual increase in inflation below 3% for a third straight month.”
In consequence, central banks may decrease interest rates as 2024 progresses. Indeed, some experts and prediction tools now expect the Fed to start tapping the target interest rate downwards as early as March.
This would provide a potential boon for borrowers and real estate investors. Rather than proceeding with the standard capital deck, now is the time for savvy investors to get creative and exploit the anticipated interest rate-time horizon. Innovative strategies like investing in Opportunity Zones allow investors to retool their portfolio to include more equity and, due to the tax deferral possibilities that Opportunity Zone investments bring, wait for more friendly interest rates.
In 2024, Opportunity Zones present investors with a unique vehicle that soaks up capital gains into equity positions. One’s stake in these projects can then be cashed out via refinance after a two-year hold — a time period that aligns well with the anticipated interest-rate horizon.
Opportunity Zones are a winning combination
A number of my clients are utilizing this strategy to good effect. For instance, one has invested in a multi-million dollar mixed-use development in New Jersey. This Opportunity Zone project has been able to attract the necessary equity despite higher interest rates due to its unique tax benefits. At the same time, the new construction is bringing much-needed revitalization to that community.
This makes for a winning combination. Investors make an attractive after-tax return, while the community enjoys a dynamic new driver of revenue.
Who wouldn’t want to do good while making money? If you would like to optimize your investment portfolio while mitigating interest-rate exposure, Opportunity Zones present a compelling option as an effective real estate investment strategy for you in 2024.
Ashley Tison, Esq. is the founder of OZPros, the leading Opportunity Zone consultancy. A leading consultant and attorney on Opportunity Zones, tax advantaged structures and investing strategies, he is an engaging and enthusiastic speaker on topics such as opportunity zones, tax advantaged alternative investments, real estate, and tax planning for leading national conferences and educational seminars.
