Opportunity zones have proven to be of great significance to real estate investors. For example, the program enacted in 2017 gives private investors or real estate developers a chance to invest in economically distressed communities. Meanwhile, they can enjoy capital gain tax incentives. The creation of the opportunity zones aimed to help enhance economic growth and encourage investment in low-income areas. Therefore, based on the experience and skills in real estate investment, her is more insight on the potential of opportunity zones for real estate development.
Pros And Cons of Opportunity Zones
Pros
As an investor, there is a higher chance that when you invest in an opportunity zone, you will enjoy financial gains based on various reasons, as discussed below.
It Has Lower Prices with Higher Appreciation.
It is always cheaper to buy homes in an opportunity zone with a higher appreciation rate and value increases. In turn, this increases the property's value compared to the national trends. Since the areas are distressed regions, the opportunity zones are a tool for good bargains you can use as an investor. The reason why it has good bargains is that most investors are not interested. In turn, it leads to low demand and lower prices.
Tax Breaks
If you invest in opportunity zones, you can enjoy tax incentives, which improve with time as you own the property. As an investor interested in investing in these regions, you can defer the federal taxes on capital gains. If you invest in the opportunity zones, you will have a 10% capital gains tax exclusion, that is, if you hold the opportunity fund or the eligible property for five years. The deals get better with 15% exclusion if it is for seven years and 100% for exclusion after ten years.
As an investor, you also have a chance to put an existing asset with capital gains into qualified opportunity funds, which will be taxed once sold in or at the end of 2026.
Cons
Before investing in the opportunity zones, you must understand the disadvantages of this type of investment and program.
Limitation On Tax Incentives
You will only have a chance as a real estate investor to take advantage of the tax incentives linked to opportunity zones after making a considerable upgrade to the property you purchase there.
Investment Risks
There are a lot of investment risks associated with distress areas that you will be exposed to as an investor. Some of the risks you must analyze as an investor is if the property will attract potential tenants who can pay on time. Suppose the tenants can maintain the property's condition and damage the property's fixtures and appliances. Suppose the investment will last long enough for you to realize the capital gains tax incentives.
Before investing in the qualified opportunity zones, it is important that you do your due diligence and understands what you are investing your money on. Having a rough knowledge of how the opportunity zones operate the process and the steps you need to follow before investing will help avoid many mistakes. At the same time, it will be important to understand the pros and cons associated with qualified opportunity zones to weigh the benefits against the disadvantages to make a reasonable move.
