There is a lot of buzz among investors surrounding Opportunity Zones. But what do we know about where investments are being made and how these investments are performing? With 8,700 certified Opportunity Zones to choose from, there is no shortage of opportunity. The challenge is knowing where to put your money.
What Are Opportunity Zones Anyway?
On December 22, 2017, the Tax Cuts and Jobs Act created a new section of the tax code that provides tax incentives for investments in certified Opportunity Zones through Opportunity Funds. Opportunity Zonesare census tracts, nominated by governors and certified by the U.S. Department of the Treasury. Opportunity Funds are investment vehicles that invest at least 90 percent of their capital in Qualified Opportunity Zones. The objective of the program is to promote economic development in low-income areas by offering investors substantial federal tax advantages.
The Tax Benefits of Investing in Opportunity Zones
To qualify for the tax incentives, investors must invest the gains from a sale of a prior investment within 180 days. Only the gain or profit must be rolled into an Opportunity Fund, not the original principal. And only the taxable gains rolled over into an Opportunity Fund are eligible to receive the tax incentives.
The tax incentives can be realized in one of three ways:
- A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund
- A step-up in basis for capital gains reinvested in an Opportunity Fund
- A permanent exclusion in taxable income of capital gains if the investment is held for at least 10 years
The Best Performing Opportunity Zones
Now that we have the backstory on Opportunity Zones out of the way, let’s return to the original question: Which Opportunity Zones are the best performing?
For a couple of reasons, the short answer seems to be, “It is too early to tell.” Until April of this year, when new guidance was released, investment into Opportunity Zones was hindered by regulatory confusion. Many investors felt that a lack of clarity in the tax code could result in an investment that ends up being ineligible for the tax benefit. The new guidance has helped to clarify areas of concern, including the types of businesses eligible for investment.
Another reason it is too early to tell how well Opportunity Zones are performing is that government (IRS) reporting won’t start until 2022. Until then, we’ll need to rely on private sources and anecdotal reports. Although official government data on their performance isn’t available just yet, experts suggest investors look at several factors to assess the potential of an Opportunity Zone investment.
Experts suggest that Opportunity Zones likely to perform above average will be near:
- Areas that have experienced rapid population growth and neighborhood improvements in recent years
- Public transportation or where expanded transportation is being added
- Areas that have very expensive housing
- Areas experiencing an affordability crisis
- Major employment hubs and job centers
- Areas experiencing rapid business growth
Several Opportunity Funds and organizations have produced their top picks for Opportunity Zones.
Fundrise , for example, published its list of the top 10 Opportunity Zones in the country with more immediate growth potential:
- Oakland: West Oakland, Uptown, Jingletown, and Coliseum Industrial
- Los Angeles: Downtown and South Los Angeles
- San Jose: Market Almaden, Washington Guadalupe, East Northside, Jackson Taylor, and Mayfair
- San Diego: Golden Hill, South Park, and Barrio Logan
- Seattle: Beacon Hill and the International District
- Portland: Pearl District and Central Eastside
- Phoenix: Downtown, Tempe, Chandler, and Mesa
- Nashville: East Bank, Five Points, 12 South, and Edgehill
- Atlanta: Bankhead, Grove Park, and English Avenue
- New York City: Brooklyn
LOCUS , a national coalition of real estate developers and investors who advocate for sustainable, equitable, walkable development in America’s metropolitan areas, also created a ranking of Opportunity Zones. Their ranking is based on the walkability, job and housing density, and proximity to centers of economic activity. The top 10 Opportunity Zones according to LOCUS can be found in:
- Downtown Portland, Oregon
- Downtown Oakland, California
- Downtown Seattle, Washington
- Center City East, Philadelphia, Pennsylvania
- Inner Harbor, Baltimore, Maryland
- Downtown Newark, New Jersey
- Downtown Detroit, Michigan
- Journal Square, New York
- Downtown St. Paul, Minnesota
- Wilshire Central BID, California
The Bottom Line
While we don’t have any hard data about Opportunity Zone performance, it seems the characteristics of a good real estate investment apply here, just as they do with traditional real estate investments. Because of the buzz around tax incentives, Opportunity Zone investments are attracting outsiders who may be less savvy when it comes to picking a good investment. It will be important for these new investors, as well as the experienced, to look at the merits of the investment in and of itself in addition to the potential tax benefits. With smart investing choices, this program has the potential to benefit investors and the communities in need.