New Opportunity Zone Legislation Could Bring Huge Incentives To Investors

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If a bill introduced in the Senate earlier this week is successful, then states like California and Florida could soon benefit from a new type of “Opportunity Zone” similar to those created in the 2017 Tax Cuts and Jobs Act.

Florida Panhandle Could be Prime Beneficiary of Bill

Marco Rubio (R-FL) and Rick Scott (R-FL) hope to leverage the legislation to create tax breaks for investments made in companies or property in areas affected by natural disasters, such as hurricanes and wildfires. Rubio and Scott named the bill the “Disaster Opportunity Zones Act,” and state the legislation will “help stimulate local economies and encourage private investment from job creators by allowing many of these areas to become opportunity zones”[1].

In Florida, these zones would likely encompass areas affected by Hurricane Michael, which leveled large portions of the Florida panhandle last year. However, not all of the towns in the affected areas are interested in being a target for these investment dollars. Mayor Al Cathey of Mexico Beach, for example, has been vocal in his stance against developers and investors hoping to enter the area, rebuild, and make a profit in the process. Cathey and his city council recently decided not to change their zoning laws to allow larger (and pricier) development in the area after Mexico Beach was, in the words of one local broker, “swamped” with investor groups[2].

“You’ve come to the wrong place,” Cathey reported telling an investor group that approached him directly. “We are not interested in changing who we are to accommodate money.” Local groups are also encouraging homeowners who have not yet rebuilt in the wake of Michael to hang “Not for Sale” signs on their properties and approach local buyers first in the event that they must do so. Roughly half of all residences in the Mexico Beach area were destroyed or substantially damaged during the category 4 storm, and anyone wishing to rebuild must adhere to much more expensive and stricter building standards when they do so.

California Wildfires Included

In California, this bill would expand the areas where opportunity zones could be created in “tracts affected by…the Mendocino, Carr, Camp, Woolsey, and Hill wildfires.” The opportunity-zone designation would be achieved in the same manner established in the original Tax Cuts and Jobs Act of 2017 legislation, which relies on governors to identify and designate such areas[3]. Any areas declared “major disaster areas would be eligible up to either 25 percent of the eligible population census tracts in the State or 25 in total number.

Areas affected by the California wildfires of 2018 have languished, waiting for disaster recovery assistance for months. The Disaster Opportunity Zones Act would potentially resolve problems associated with other monetary relief proposals, which have been mired in disagreements over whether to include money for Puerto Rico. Category 5 Hurricane Maria devastated Puerto Rico in 2017, resulting in nearly 3,000 deaths and prolonged power outages and infrastructure instabilities that have not been fully resolved to this day[4]. The Disaster Opportunity Zones Act makes no mention of Puerto Rico and could move through Congress more quickly than a bill requiring direct federal funding since opportunity zones rely on investors to provide capital in exchange for future tax advantages.

Opportunity Zones have a Limited Life Span, Huge Potential Benefits

Under existing legislation, opportunity zones offer three primary tax benefits:

  1. Deferred taxes on original gains invested in the zone
  2. Reduced taxes once the taxes are due
  3. The potential to eliminate taxes on gains from the investment in the opportunity zone in certain circumstances involving prolonged investment in the area

Although opportunity zone investments may have a lifetime extending, according to present legislation, until December 2028, investors presently must make their investments in these funds by the end of this year in order to meet the minimum seven-year holding period that will create a 15 percent reduction in taxes on capital gains invested. Investors must make their investments by the end of 2021 to achieve the lower 10 percent reduction option. This new bill creating disaster opportunity zones could extend that timeline, offer additional flexibility and options to investors not presently equipped or prepared to invest in these funds, and create a situation in which governors could add more opportunity zones in their states at later dates.

Have you invested in an opportunity zone? Do you plan to?

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