In just the last month, through the implementation of Trump’s tax plan, a compelling new tool to spur investment into property across Arizona has been adopted. The Opportunity Zone was created to promote investment in areas that states want to see further economic activity.
The tax bill allowed governors to submit for approval on various sites. In Arizona, Gov. Doug Ducey was approved for 168 sites that will provide a tax incentive for new investment. The law provides for a reduction or total waiver of capital gains tax if an investment is made into an O Zone location.
The O Zone promotes investment in assets like commercial property or land – pumping some serious oxygen and opportunity into the Arizona market that didn’t exist a week and a half ago.
An interested investor would create his own O Fund and then direct the funds through that corporation to one of the permitted uses, or invest in a pre-existing O Fund.
The law is really quite broad and definition will occur over the next many months as guidance is issued at the federal level. The advantage is you are not taxed on the capital gains you invest into the O Fund to buy property until (1) the property is sold; or (2) December 31, 2026. The capital gains you will have to pay are reduced 10 percent when the property is held for five years and an additional 5 percent when held for seven years. In tax terms, this is referred to as a stepped-up basis.
If the fund owns the property for at least 10 years, you will pay no tax on the appreciation of the property, other than the original deferred capital gains that must be recognized by December 31, 2026. So, you can see this is really compelling for anyone who has assets they might sell for a gain. If you purchase a commercial performing asset, there are requirements about necessary improvements you must make to get the advantage so it becomes a bit more involved than the land holding option. In any case, many types of business can operate in an O Zone and the law details how each will be treated.
In just the month since the federal government approved Gov. Ducey’s suggested sites, we have collectively advised a wide variety of people and corporations on how to fully use this new (and really fantastic) tool. This ranges from the stock investor who has no property assets but intends to sell stock this year for a significant gain, to those who own property that is designated as an O Zone, and those who are selling property and want to invest their gains into an O Zone property to defer capital gains tax. Regardless of your political feelings about our current administration, we can all agree that this is a most rare gift from the federal government.
Jim Belfiore is president of Belfiore Real Estate Consulting.
Jordan Rose is president of Rose Law Group.
Read more stories inside: NewHome.phoenix.org/