Map Credit: Housing and Urban Development Opportunity Zone Locator
By: Alex Griffin
Investment Associate | Beman Group
Blanchard and Calhoun Real Estate | Commercial Division
Government incentives are a great way for real estate investors to increase their return on investments. These incentives usually fall in 3 categories: (i) decreasing your individual tax obligation, (ii) lowering the total project costs, or (iii) lowering the project’s annual operating expenses. Let’s focus on four of these incentives available in most municipalities. (Note: I will focus on the programs available in Augusta, Georgia as this is my home market).
1. Federal Opportunity Zone.
The Federal Opportunity Zone is the newest government program designed to boost investment in traditionally blighted areas, or lower-income census tracts. Each state’s governor submits eligible census tracts in their state to the US Department of Treasury. A map of these zones can be found here: https://opportunityzones.hud.gov/resources/map. The program encourages investment in these areas through a “capital gains tax deferment.” Let’s look at an example:
Suppose an investor sells $1,000,000 of stock that they previously bought for $200,000. Their capital gain in their investment is $800,000 and would owe tax on that gain (at a current rate of 0%-20%, depending on their income bracket) of approximately $16,000. As a way to defer that tax into the future, the investor can take their gain and purchase a building in one of the Opportunity Zones. Note that the gain can come from any type of appreciated asset, unlike 1031 Exchanges which require “like-kind” property. The $800,000 gain is then deferred until either the investor sells the new asset they purchased or until December 31, 2026 (whichever occurs first). The investor then has 30 months from acquiring the new asset to “substantially improve” the new asset, meaning investing as much money into the property as they paid for it. A lot of the buildings in these Zones can be purchased for low prices, and any sort of rehabilitation expenses would certainly meet the “substantially improve” threshold. Additionally, if the new investment is held for at least 10 years, then any gain on the new investment is not taxable.
More information on Opportunity Zones can be found here: https://www.irs.gov/credits-deductions/opportunity-zones-frequently-asked-questions
2. Enterprise Zones.
Enterprise Zones are designated areas that traditionally suffer from disinvestment, underdevelopment, and general economic distress. In an effort to boost investment in these areas, Georgia law permits cities to create districts where property taxes are abated for up to 10 years. Maps of these areas can be found on various city or county websites. Enterprise Zones are ways to lower the annual operating expenses of a property and boost net income.
3. Tax Allocation Districts/Tax Increment Financing.
TADs and TIFs are zones or projects that use the increase in tax revenue to fund the costs of infrastructure and improvements. Municipalities issue tax exempt bonds to pay for infrastructure and other redevelopment costs in partnership with private developers. The investment is designed to create new jobs and generate new sales tax revenue that is then used to pay the bonds. A map of the TADs in Augusta is found here: https://www.augustaga.gov/DocumentCenter/View/7349/TADzonesAll_December2015?bidId=
4. Historic Tax Credits.
There are both federal and state tax credits available for historic structures. Federal tax credits are available for up to 20% of the rehabilitation costs in a historic structure (owner-occupied residential structures do not qualify). The Georgia credit is for 25% of the rehabilitation costs, up to a current cap of $300,000. If you are not an entity that can apply the tax credits, you can sell the credits to a tax credit investor, typically at a discount (approx. $0.75 on the $1) and apply those cash proceeds to your project cost. By lowering the total cost of your project, equity returns will increase as less equity is needed upfront. Additional information on the federal and Georgia programs is found here:
*Note: All potential investors should speak with a qualified expert in these areas, such as a lawyer or accountant, before taking advantage of any of these programs. All examples are for illustration purposes only and not intended to be actual examples.