The federal tax overhaul (a.k.a. the Tax Cuts and Jobs Act) includes an intriguing tax incentive for potential investors in Portland real estate. If gains from the sale of assets are reinvested in eligible census tracts – identified as Opportunity Zones – the investor can qualify for deferral and reduction of the taxes that would otherwise be immediately due on the sale of those assets. The Opportunity Zone incentive also has the potential of totally eliminating capital gains tax on the appreciation of the new investment. Opportunity Zone investment takes place through a Qualified Opportunity Fund (O-Fund), which anyone can set up and self-certify.
In Oregon, 86 census tracts have been approved as Opportunity Zones, including broad swaths of Portland’s red hot Central Business District (including the Pearl District). Opportunity Zone investment could involve new development, redeveloping dilapidated residential or commercial properties, or investing in an existing business. The earlier an O-Fund project is launched, and the longer it is held, the more incentive is available. O‑Fund projects must be in place before December 31, 2026. A ten-year hold frees any appreciation on the sale of an O-Fund project from capital gains tax.
As an example, let’s take Developer Z, who sold a project in early 2018 that netted $9 million in gain. In the normal course, Developer Z pays about $3 million in county, state, and federal tax and is left with $6 million. By investing the $9 million in an O-Fund within 180 days of the sale, no capital gains tax is due in the short term. That tax is due in 2026 (unless a sale occurs earlier) but is reduced by up to 15% depending on how long the new investment property is held. The potential of a reduced tax on the original gain and no tax on the appreciation of an investment held for 10 years are powerful incentives for long term investors. The O-Fund must invest the funds in qualified projects located in an Opportunity Zone within varying time limits, depending on the nature of the project.
Business Oregon has published an information page about Oregon’s Opportunity Zones, which includes a straightforward fact sheet from The Economic Innovation Group that illustrates holding incentives at the five, seven, and 10 year intervals.
These incentives mean that we could see a substantial influx of money for Portland real estate projects. I also wouldn’t be surprised to see enterprising individuals join together to form O-Funds that attract more national investors to Portland. The foregoing could extend the real estate boom Portland is enjoying. There are no regulations in place yet, and IRS guidance to date has been minimal, so professional advisors have only the new statutes to rely on. Given this lack of clear direction, O-Fund investing in the near future is not for the faint-hearted. But, those who are willing to take the leap could reap substantial after-tax returns versus similar investments that do not enjoy O-Fund incentives.