As we discussed here last month, the window to maximize benefits of the Federal Government’s Opportunity Zone program is now. As members of the multifamily space here in Denver, we need to cheer hard for this program to succeed. It wasn’t long ago our beloved 1031 Tax Deferred Exchange was on the Federal Government’s chopping block, and the Opportunity Zone Program has been put in place in lieu of eliminating the 1031 Exchange, despite all the positives that go with it. But, even with our desire to see the program succeed, and with the window on Opportunity Zone Program benefits being as open as it will ever be (and not for much longer), we just aren’t encouraging clients to go after Opportunity Zone deals. Why?

The simple answer is: real estate investors already have a better deal. The first rule of real estate investing is: Location, location, location. But the second rule, right behind the first rule, might as well be: Defer until you die. The 1031 exchange makes that possible. The Opportunity Zone program will require all qualifying participants to pay, at best, 85% of their current capital gains in less than 10 years. If there is an alternative to not pay those gains, which are substantial for a number of investors, then the incentive to pursue OZ deals is marginal at best.

The more complicated answer is that the program, in general, is a risky proposition at best.  Denver’s heated multifamily market makes it almost impossible to find a qualifying Opportunity Zone deal that justifies the near-term financial commitments the program requires. There just aren’t that many value- add deals around. Pair that concern with macro issues with OZ deals that include a) the real estate market holding its value for the next 10 years so there are actually new gains to wipe away and b) what tax rates on capital gains in the future will be when current deferred gains have to be realized.

The concerns go on. However, there is one very specific scenario where the Opportunity Zone is a very attractive option to our multifamily clients. That scenario (which you need to confirm with a CPA) is:

A client goes into the 1031 Exchange and at the end of the 45-day identification window, there are no suitable exchange deals to identify (probably because that investor did not work with the Hornstein Fetter team). In that event, the client can change course and pursue an Opportunity Zone Fund provided they declare the switch prior to the expiration of their 45-day 1031 ID window. In this scenario the client will have 180 days (from sale of their downleg) to ID the Opportunity Zone deal and then begin jumping through the other hoops to get maximum OZ benefits.  Their current cap gains are protected (for now), they get their original basis back (which is nice) and they have the chance to wipe away some new gains.

That’s not a bad outcome at all. But it’s not a better outcome than just using the 1031 Exchange to continue to grow wealth, which is why you should contact us at Hornstein.Fetter@Pinnaclerea.com or 303-962-9564.