The Qualified Opportunity Zones Program was introduced with the 2017 Tax Cuts and Jobs Act. The program aims to boost economic growth to disadvantaged and ‘economically distressed’ communities. It does this through providing valuable opportunities for real estate investment, development and tax incentives for investments in specific areas designated as Qualified Opportunity Zones (QOZs).
What does this mean for you as a real estate professional?
Thousands of low-income communities across the country are designated as QOZs. If you have listings within a QOZ, this gives you additional selling firepower to encourage prospective buyers to invest.
Here are some tips to make the most of the QOZ program.We’ll also take a look at the risks, so you can protect your real estate business.
#1 Familiarize Yourself with How QOZs Work
Investors in QOZs will enjoy multiple tax-related benefits. From capital gains tax deferrals to a sliding scale of tax breaks when a property is held for 5-10 years, the QOZ Program provides valuable savings to the astute investor.
It’s a requirement that investments are made via an ‘Opportunity Fund’ which may be a partnership or a corporation holding at least 90% of its assets in QOZ property. This can include stocks, partnership interests and/or other tangible assets used in trade or business within a QOZ (for example, real estate properties or businesses operating in the QOZ).
The program also requires that QOZ business property be new or improved, meaning further investment is required beyond the initial purchase (if unimproved or minimally improved land is purchased, the land must be substantially improved). Additionally, there are reporting requirements for investors to maintain their tax incentives.
You should encourage your prospective buyers to seek further information about the program themselves. Suggest they obtain independent legal and financial advice about whether the program offers an effective investment for their particular circumstances.
#2 Stay Within Scope When Providing Advice
You must not provide advice to clients or prospective buyers that goes beyond your level of expertise. As a real estate professional, you can provide expert advice on the property market, recent sales figures and developments and even information about the communities where your listings are located. But, be very wary of overstepping the mark and providing advice on something for which you are not trained to provide advice. Otherwise, you could find yourself facing a lawsuit.
It sounds easy in theory, but in reality, people ask real estate agents questions every day that are not strictly within the scope of a real estate professional’s expertise. For example, a potential investor may ask you how an opportunity fund would work legally. They might ask for specific details about how they might form an opportunity fund. Or they may seek financial advice about how the program will save them money or what tax cuts they may enjoy if they invest.
When asked an out-of-scope question,suggest that investors discuss the matter with their accountant, attorney or other qualified professional to make an informed decision.
#3 Remember, You Still Need To Disclose
Failure to disclose important information is one of the main reasons real estate professionals find themselves in court defending a lawsuit. QOZs are located in economically distressed and disadvantaged localities. Regardless of the tax incentives and investor benefits available as part of this program, there’s still a requirement for you and the seller to disclose any defects or issues that may materially affect the value and desirability of the property.
#4 Use the Resources Available
Management of the Qualified Opportunity Zones Program has been delegated to the Internal Revenue Service (IRS). You can find the latest regulations and guidance on their website. A comprehensive list of frequently asked questions is also available.
To search what QOZs are located in your state, use this useful map tool.
The US Department of The Treasury Community Development Financial Institutions Fund also has a range of other Opportunity Zone resources available on their website.
Additionally, the NAR has put together a comprehensive toolkit to help real estate professionals navigate the QOZ Program.
#5 Make Sure You Have the Right Insurance
Dealing with out-of-the-ordinary transactions like this can increase your vulnerability to a lawsuit if something goes wrong. That’s why real estate professionals must have adequate E&O insurance coverage to protect against a lawsuit.
Contact CRES at 800-880-2747 for a confidential discussion about your insurance needs today. As real estate E&O specialists, we can find you the right coverage choices for you and your business. And, with CRES E&O + ClaimPrevent®, you’ll have access to a team of legal professionals 7 days a week, so you can prevent legal issues before they become lawsuits.