Opportunity Zones in South Florida

Many investors, especially in South Florida, should be excited to hear that The Internal Revenue Service (IRS) has recently extended the due date for investments in Qualified Opportunity Zones until December 31, 2020. The plan is to lure capitalists that have mainly sat on their cash and assets amid the global Coronavirus (COVID-19) pandemic.

When initially implemented under the 2017 Tax Cuts and Jobs Act (TCJA), federal Qualified Opportunity Zones (QOZ) delivered a new hope for economically distressed communities in the country. The federal program was developed to promote financial advancement and also work creation in low-income communities with making use of long-term investments. Since the opportunity zone program began in 2018, it has gone through multiple revisions regarding eligibility and types of investments permitted according to the program.

Overall, the objective of the program is two-fold: (1) financial investment in a QOZ will rejuvenate the poverty-stricken communities and also, (2) if a taxpayer invests in eligible QOZs, the taxpayer will receive preferential tax treatment.

Where Are The Opportunity Zones in Florida?

There are now designated QOZs in each of the 50 states and DC. Notably, Florida has 427 designated QOZs, which are solely in low-income communities, as the state did not designate any eligible non-low-income boarding communities as opportunity zones.

Contrary to popular belief, Florida is very much an urban state. Only 4 percent of Florida’s census tracts are in rural areas. As it pertains to opportunity zones, 7 percent are in rural communities, while 93 percent are urban communities. In South Florida, there are 123 Opportunity Zones, including 67 in Miami-Dade, 26 in Palm Beach, and 30 in Broward counties. Approximately 16% of South Florida’s commercial assets are located in Opportunity Zones.

Analyst Agree that Miami, West Palm Beach, and Fort Lauderdale are among the best places to invest in Opportunity Zones

In Southern Florida, in Miami-Dade County, areas like South Miami, Coral Gables, and Wynwood are considered to be hot spots for Opportunity Zone investments given their location, primarily their access to road systems and water. Similarly, in Broward County, parts of Fort Lauderdale, Pompano Beach, and Hollywood will probably see investment interest given their access to highways and the rail systems already in place.

Appreciation of the value of investments in qualified businesses or real estate within the Opportunity Zones that are held for a minimum of 10 years will not be subjected to federal capital gains tax as long as the investment is sold before December 31, 2047. In general, the longer an entity has an investment within a Qualified Opportunity Fund within a QOZ, the more it can reduce its capital gain― by 10 percent, if held for five years or by 15 percent, if the property is held for seven years or longer.

Interested potential investors are already focusing on deploying capital in Florida and elsewhere in substantially improving various asset classes.

QOZs are designed to spur development in economically stricken neighborhoods

The QOZ program is the most hands-off Federal initiative designed to spur economic development in low-income communities in the last 50 years. Current IRS regulations do not require OZ projects to meet affordable housing requirements or other reporting standards that have characterized Enterprise Zones, the Low-Income Housing Tax Credit, the New Markets Tax Credit, and similar programs established in the past.

However, it must be noted that since the term “trade or business” as used to characterize a QOZ is quite vague and broad, there is the potential that many projects may bear little relationship to a community’s economic needs.

In any event, in some locations, newly created opportunity zones are doing their job in South Florida. However, nearly 18 months after the program began, it is too soon to say whether the federally qualified zones will lead to long-term, neighborhood-wide benefits. South Florida investors can’t get enough information about the federal Qualified Opportunity Zone program. However, they’ve been slow to actually invest, partially spearheaded by the Coronavirus (COVID-19) pandemic. However, with the recent IRS changes to the program through Notice 2020-39, issued on June 4,2020, hopefully, this will provide some hope and relief for South Florida Investors.  

Specifically, some of the changes are as follows:

As it pertains to the 90 percent asset test between April 1, 2020, through December 31, 2020, investors are getting time to comply with this requirement.

  • 180 Day Investment Period was also extended until December 31, 2020.
  • The 12-month reinvestment period for QOFs has been extended for up to 12 additional months.
  • The IRS will now ignore the period beginning April 1, 2020, and ending December 31, 2020, for calculating any 30-month substantial improvement period, and essentially the 30-month substantial improvement period is tolled during that period.
  • The 31-month working capital safe harbor period has also been extended up to 24 additional months

Overall, the pandemic, coupled with the preceding IRS regulations, presents many unique opportunities in the real estate market, particularly in QOZs. As the country slowly begins to reopen, properties available for redevelopment within QOZs will probably become more accessible for investors. If South Florida properties within QOZs are redeveloped by potential investors, many South Florida neighborhoods, which were economically challenged in the past, may begin to prosper under the program. Overall, QOZ may spearhead investors to help rebuild struggling neighborhoods and areas that were made worse by the global COVID-19 pandemic.