Are Opportunity Zone Benefits All They Promise?

There is a frenzy around opportunity zone investments and the capital gains tax benefits that come with them, but for commercial real estate investors and developers, 1031 exchanges will likely provide better tax benefits. That is because there are mitigating circumstances to receiving the tax benefit from the qualified opportunity zone. Bryan Shaffer, principal and managing director of George Smith Partners, has outlined five reasons why the tax benefits of opportunity zone investments might not be as advantageous as expected.

First, Shaffer says that the capital gain must be reinvested, and he calls this the most “misunderstood” aspect of the qualified opportunity zone feature. “The most misunderstood part of qualified opportunity zone investments is that you only receive the tax benefits if the investment comes from a capital gain that is reinvested. New money receives no tax benefits,” Shaffer tells GlobeSt.com.

Second, the capital gains tax benefit works better for the large capital gains earned by corporate, stock, bond and casino investors. “Most corporate, stock, bond, and casino investors who make a large gain have to pay capital gains tax. Therefore, these are the most likely types of investors that are going to invest in QOFs,” he says. Real estate investors on the other hand receive better benefits through a 1031 exchange. “Because of the 180-day reinvestment rule for both QOFs and 1031 exchanges, managers of high-net-worth capital and investments banks are more likely to have clients with this type of gain, so they will most likely put together this type of investment fund,” adds Shaffer. “A standalone real estate investment fund would be more likely to attract co-investors who know people with large capital gains.”