Updated: May 5
Real estate investors often ask, “What and where are Opportunity Zones in San Diego?”.
Let’s break these two questions up to give you the best answers.
What are Opportunity Zones in San Diego?
The 2017 Tax Cuts and Jobs Act (TCJA) created Opportunity Zones across the nation to stimulate development in economically distressed communities. Capital Gain tax incentives encourage private investors to purchase and develop these properties.
The IRS explains Qualified Opportunity Zones (QOZ) as an economically-distressed community where qualified new investments get preferred tax treatment. Each state designates which localities qualify as a QOZ. The Secretary of the U.S. Treasury certifies each one and delegates authority to the IRS to apply the preferred tax treatment.
But, the law expires on December 3, 2026. So, investors need to make all their purchases by that date unless this law gets an extension for further years.
In the 50 states and the District of Columbia over “8,761 designated Qualified Opportunity Zones” exist. This lists all 50 states and D.C. in a pdf. file:
Alphabetically by State;
Census Tract Number;
Tract Type; and
ACS Data Source.
What Tax Benefits for Investing in a San Diego Opportunity Zone Property?
Legally avoid paying the capital gains tax with the Opportunity Zone laws. Similar to an IRS 1031 Like-Kind Exchange, the Opportunity Zone laws defer your capital gains if you reinvest your gains within 180 days of your sale.
Capital Gain Tax Reductions: Purchase and develop a San Diego Opportunity Zone property and hold on to it for five years. Then, 10% of your capital gain becomes tax-free permanently. Hold on to the property for at least seven years and the tax reduction increases to 15%.
Tax-Free: Hold your investment for at least 10 years and your entire capital gain becomes permanently tax-free when you sell your San Diego Opportunity Zone property.
To sum up, the Qualified Opportunity Zone program offers real estate investors three tax advantages:
Deferring capital gains taxes when selling the QOZ property;
Ability to eliminate part of the capital gain tax; and
Ability to get a permanent tax-free gain after 10 years of appreciation.
What Qualifies Opportunity Zone Properties?
Above all, you must do more than purchase a property in the Opportunity Zone. The purpose of this program is to improve distressed communities. So, these conditions are also required:
A Qualified Opportunity Fund must own the property. This means you can’t buy a qualified property in your name or an LLC. You must invest your funds into a Qualified Opportunity Fund that makes the purchase.
Furthermore, the Qualified Opportunity Fund must make substantial improvements within the first 30 months of ownership. Experts claim that at least the same amount of funds to buy all property structures must make the required “substantial” improvements. Deduct the cost of the land from the purchase price as the rest equals what the fund paid for the structures.
How to Form a Qualified Opportunity Fund?
In short: A Qualified Opportunity Fund (QOF) is an investment entity filing either a partnership or corporate federal income tax return. Also, it identifies itself as organized for the sole purpose to invest in Opportunity Zone properties.
Most importantly, investors must do what is similar to a 1031 Like-Kind Exchange. The capital gains get invested into a Qualified Opportunity Fund which buys property in a Qualified Opportunity Zone.
Therefore, a QOF must meet these four requirements:
The funds come from an entity that files a tax return (partnership, corporation, multi-member LLC, etc.). Sole owners or single-member LLCs do not qualify;
Legal documents forming the QOF must state the purpose to invest in Qualified Opportunity Zone property;
The QOF must use at least 90% of its assets to purchase Qualified Opportunity Zone property. To meet this requirement, experts suggest forming a new entity to act as a QOF; and
The QOF must file an IRS Form 8996 self-certification as a QOF every year with its annual tax return. A late-filed tax return may disqualify the QOF status. The self-certification form must state the first month during the initial tax year that the QOF began.
Moreover: these Opportunity Zone tax benefits are not limited to the sale of rental properties. You can use this program to defer capital gains tax from sales of other assets besides real estate. For instance, the sale of stocks and business interests qualify as capital gains funds to reinvest in the QOZ program.
Tax Election – After meeting all the requirements for the QOZ tax benefits, as a taxpayer, you must make an election for the tax deferral in your individual tax return for the year of the capital gain.
How an Opportunity Zone Differs from a 1031 Like-Kind Exchange?
You only need to reinvest the capital gains and not the entire sales proceeds like you do in a 1031 Like-Kind Exchange.
This means you can keep the rest of your sales proceeds and not pay taxes on them.
In addition, other benefits of the Opportunity Zone program over a Like-Kind Exchange include:
The right to choose non-like kind property (real estate) to reinvest into when selling stocks and business interests;
Not using an exchange intermediary; and
Avoiding the Like-Kind Exchange 45-days to identify replacement properties rule.
However, the 180 days to close on the reinvestment purchase rule is similar to a Like-Kind Exchange.
How to Find Qualified Opportunity Zones in California and San Diego County?
The State of California prepared an Excel spreadsheet listing all the counties with Designated Qualified Opportunity Zone Tracts of land. They are identified by:
Poverty Rate; and
Median Family Income.
San Diego has 46 of them. You can download the Excel sheet by clicking:
In addition, the Community Development Financial Institutions Fund’s Opportunity Zones Resources page answers many questions about the Opportunity Zones in California.
Before purchasing a property learn about the Escrow Closing Costs in San Diego. Similarly, Why You Need to Use an Experienced California Real Estate Agent.
What and Where are Opportunity Zones in San Diego? - Conclusion
We answered the question, “What and where are Opportunity Zones in San Diego?”.
Let’s sum it up – The purpose of Opportunity Zones is to stimulate private investments into economically distressed communities. The federal government provides several tax incentives to encourage private investors to purchase and develop these properties.
The State of California publishes an Excel spreadsheet listing the Qualified Opportunity Zones by county.
These properties require purchasing from a Qualified Opportunity Fund (QOF) to invest at least 90% of its assets into QOZ properties.
Thus the Qualified Opportunity Zone program offers three tax benefits:
Capital Gains Tax Reduction – Investors holding their investment in a Qualified Opportunity Fund for at least five years reduces their capital gains tax by 10%. After seven years, the tax reduction increases to 15%.
Capital Gains Tax Deferral – Investors re-investing their capital gains into a Qualified Opportunity Fund for at least 10 years permanently defers federal tax payments on the realized gains.
Eliminating Taxes on Future Gains – Investors holding onto their Qualified Opportunity Fund investments for at last 10 years avoid federal capital gains tax on their realized gain.
Interested in San Diego Opportunity Zones?
SoCal Lifestyle Realty can help you. Let our experienced Realtors assist you with locating Qualified Opportunity Zone properties in San Diego County.
Contact us for all your real estate sale and purchase needs in the greater San Diego area.
Steven Rich, MBA – Guest Blogger