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Discovery Idea:

Opportunity Zones

Zonability is helping you understand Opportunity Zones from the perspective of a residential agent, investor or broker. 

What is an Opportunity Zone?

Opportunity zones (OZ) are designated based on census tract boundaries areas for investments in primarily economically poor locations. Investors who set up a new entity or form a partnership just for this purpose and play by the rules that include annual filings showing substantial investment in a property or business located in OZ, benefit through a tax reduction or break.

What is Considered an Investment?

Investments in property, a business or both (this means real or personal property) qualify; however, an individual can't participate. This means there is a requirement to set up a company or partnership and then, the entity can invest in property, a business or both.

When does the opportunity to make an investment in OZ end?

Program for qualifying ends at the end of 2026.

How long is an investment period?

Time lines that matter are 5, 7 and 10 years with the 10-year holding period providing the greatest benefit. 

The following is a FAQ developed with input from Jimmy Atkinson and Ashley Tison, both experts in OZ. We appreciate their input and have included their contact information to help our clients*.

Does the OZ program apply only to commercial properties or any property located in an OZ location?

No, it is for any property.

If there is an existing house that is older, perhaps a tear down, what are the options to consider in an OZ location?

Assuming a tear down scenario, the rules for OZ apply the same as if improving an existing structure: the owner must meet the “substantial improvement requirement” and this can’t be an “owner-user” occupancy.

Another idea for a residential property would be to add an Accessory Dwelling Unit. Local zoning rules apply in Texas.

What is the rules for “substantial improvement requirement”?

The buyer has to make a substantial improvement to the property, excluding land value, equal to the purchase price plus $1.00.

The property needs to be improved by more than the building value (land value is excluded from the calculation) in order to qualify as "substantial improvement." In the case of a $1 million purchase price where the land is valued at $250,000 and the building is valued at $750,000: in order to qualify, there needs to be $750,001 of improvements made to the property. 

Does it matter if the property is owner occupied or rented to quality for the OZ benefits?

Properties must be rented. Owner occupied properties do not qualify.

If a property located in OZ is purchased with plans to tear down the existing structure and built a new house or structure, what other requirements are needed to show continued improvements as per OZ requirement?

None, the property must show substantial improvement and be rented. 

* Is there someone I can contact to learn more? 

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Pleate note, the following individuals may be contacted if you wish to learn more about Opportunity Zones in terms of how they are set up, managed etc. Beyond Value, Inc., which owns and operates the Zonability product line, does not have an association with either and does not charge a fee or collect a referral fee for anyone who contacts them. Please do your due diligence, as is always recommended in matters pertaining to potential investment decisions. 

Jimmy Atkinson

OpportunityDb

https://opportunitydb.com/

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Ashley Tison

Opportunity Zone Consultant

http://www.ozpros.com/

Descriptions/definitions

CDFI Stands for Community Development Financial Institutions Fund
Qualified Opportunity Fund (QOF) Eligible corporation (LLC) or partnership needed to take advantage of the tax benefits.
Qualified Opportunity Zone Locations identified by the State’s government.
Qualified Opportunity Zone Property Includes stock, partnership interest and business property all of which must meet the requirements for being “qualified.”
Qualified Opportunity Zone Business Excludes certain businesses specifically, golf courses, country club, massage parlor, hot tub facility, suntan facility, racetrack or other gambling activity, liquor stores.
For the acquisition, construction and/or substantial improvement of tangible property in a qualified opportunity zone.

Where can I review official government explanations?

IRS - FAQ on OZ

IRS form 8996 instructions