As we enter the latter half of 2019, the time to take advantage of the Tax Cuts and Jobs Act of 2017 is nearly up. This act created “qualified opportunity zones” to encourage the revitalization of struggling neighborhoods throughout the U.S. Investments that are made in these zones before the end of 2019 can qualify for tax incentives that allow property owners to keep more of their gains on their investments.

What are opportunity zones and how do they work?

Opportunity zones are census tracts that the state or federal governments have identified as in need of economic development. The goal behind the creation of these zones is to encourage investors to purchase and rehabilitate properties in areas that used to be prosperous but are now struggling. There are more than 8,700 such areas throughout the country that have been designated as opportunity zones. A number of these zones are located in metro Denver and throughout Colorado.

What are the tax benefits for investors?

The tax code establishes a temporary investment vehicle known as an opportunity fund, which can be set up as a partnership or a corporation; investors place their capital gains from properties inside the opportunity zones in order to take advantages of the tax benefits. The first benefit is that the investor can defer payment of federal tax on initial gains until the property is sold, or December 21, 2026 if the investor decides to hold onto it. Holding a property can reduce the amount of taxes owed. For instance, there is a 10 percent break if an investor keeps the property for at least five years and a 15 percent break for at least seven years—this means that only 90, or 85, percent of the initial capital gain is subject to taxation. If an investor waits at least 10 years to sell the property, they can avoid paying capital-gains taxes altogether.

How can private lenders help?

There are many challenges associated with opportunity zones and funds. The main hurdle is securing financing as most of the properties and projects in these areas, though ripe for rehabilitation, are viewed as high risk. Few bank and conventional lenders are willing to approve loans for these projects. This is where private lenders come in. With no governmental supervision of their underwriting practices they can more easily approve funding for such projects. They are  more willing to listen to their borrowers’ vision for the renovated property. While private lenders will definitely want to see that their borrowers have skin in the game for such projects, it may still be possible to use after-repair values to increase the loan amounts so that they can cover much of the purchase price as well as providing some of the required funds towards the renovation and repairs. If you’re interested in this type of loan, be prepared to present cost estimates for the planned rehabilitation.

If you need a hard money loan to take advantage of these time-sensitive opportunities, contact Montegra at loans@montegra.com for more information about our hard money and private capital loan programs.