Connecticut, Massachusetts, New York and Rhode Island are all home to Qualified Opportunity Zones (QOZ) where investors can benefit from tax incentives on qualifying investments. QOZs, which are designated by a state’s governor for a 10-year term and determined based upon low-income census tracts, are often home to land prime for development and existing assets prime for adaptive reuse.
The history of Qualified Opportunity Zones (QOZs)
QOZs, which were established as part of the Trump Administration’s 2017 Tax Cuts and Jobs Act, are the first community development tax program signed into law since the 1990s and are intended to bolster the economy. They were created with the hope that reducing taxation on capital gains would provide investors an incentive for exploring distressed markets, while giving a boost to communities that have yet to experience economic recovery. Over time, this would hopefully spur further investment in these previously overlooked communities, leading to new economic development opportunities while furthering job creation.
Per the U.S. Department of the treasury: “Investors can defer tax on any prior gains until no later than December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund, an investment vehicle organized to make investments in Qualified Opportunity Zones. In addition, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be eligible for an increase in its basis equal to the fair market value of the investment on the date that it is sold.”
“The ability to avoid income tax on 15-percent of the gain, depending on the holding period, and defer taxation on the other 85-percent until 2026 makes undervalued Class-B and Class-C assets in these zones even more attractive to value-add investors,” Edward Jordan, Managing Director, Northeast Private Client Group, said.
What do Qualified Opportunity Zones (QOZs) mean for real estate investors?
Since tracts are defined by both poverty rates and income levels, several communities with high student populations are among those deemed QOZs. These communities are particularly attractive to multifamily investors who seek assets where they can maintain strong occupancy rates as demand for workforce level housing already exists.
On the flipside, it will take investors a longer time to realize the benefits of investing in a QOZ where there are limited job opportunities and, in turn, a smaller population. As businesses begin to establish roots in QOZs, the demand for workforce level housing will rise and multifamily investors will be able to maintain strong occupancy rates across their assets.
“For investors who are already seeking real estate assets in Connecticut, including Fairfield, Hartford, New Haven and New London counties, opportunity zones are an attractive opportunity to maximize returns,” Jordan said.
He added that there are also QOZs designated in submarkets such as Worcester County, Mass., Westchester County, New York, and Providence County, Rhode Island where investors can find assets prime for repositioning.
Purchasing undervalued Class-B and Class-C properties in QOZs can be a beneficial strategy for value-add real estate investors. In submarkets across the northeast, investors can benefit from tax incentives and the opportunity to reposition assets in communities that will soon benefit from added economic investment leading to both job and population growth.