The Opportunity Zone program is already working its magic on run-down neighborhoods that need help from real estate investors. A new report from Zillow shows that property prices in many of these neighborhoods have already surged 20 to 25%. That’s good news for these communities and for investors putting their money into Opportunity Zone projects.
The Opportunity Zone program was part of the Tax Cuts and Jobs Act of 2017. Investors who use capital gains from a previous investment to pay for projects within a Qualified Opportunity Zone can get a 15% tax break on those gains. They can also completely avoid the capital gains on the new investment if they keep their money in the O-Zone project for at least ten years.
Investor interest ramped up last summer when the government finished approving the areas to be certified as “qualified,” and there are plenty of them. The Treasury Department approved a total of 8,700 so-called O-Zones in all 50 states and the District of Columbia. Projects also need to be approved under a complicated set of rules, but the 10-year investment break on capital gains tax is a nice reward for the effort.
Property Values Shoot Higher in O-Zones
This new Zillow report offers reassurance that the tax break is attracting investors, and the attention is pushing up property values. Zillow Policy Advisor Alexander Casey says, “It’s still early, but we’re already seeing some signals that folks have begun to take up Uncle Sam on this offer.” He says, “The rationale behind the zones is relatively simple. Proponents argue that a lot of the money generated as capital gains could be used as seed money in traditionally neglected communities — revitalizing infrastructure, fueling economic growth, and spurring job creation and overall prosperity. But whether this tax break will direct funds to the communities that need them the most – or what happens when money arrives – remain open questions.” (1)
Zillow research shows that property prices are increasing in many low-income, high-poverty areas as part of an overall real estate trend, but that prices are increasing at a faster rate in areas that have been chosen as Opportunity Zones. Before the eligible tracts were chosen, all areas saw a 10 to 15% increase in prices. Once the final selections were made, prices for the eligible but rejected tracts grew more slowly.
Casey says, “It’s crucial to note that Opportunity Zones are still very much in their infancy, and we are measuring very early signals of how the tax breaks may correspond to real estate trends. It remains to be seen whether this uptick in Opportunity Zones is a flash in the pan, or the start of something larger.”
Top Neighborhoods for O-Zone Investment
He says it’s also possible that some investors are still watching from the sidelines and the big money hasn’t started flowing yet. So, we may not be seeing the bigger picture quite yet. Zillow researchers have, however, come up with a short list of neighborhoods that could top the list of desirable Opportunity Zones. (2)
The tracts of land that qualify for this tax credit were picked by the governors of each state before they were approved by the Treasury Department. The program was designed to help low income and high poverty areas, but many were already seeing signs of new life in the real estate market. Zillow researchers looked at these housing trends along with any changes that happened when they became Opportunity Zones. They say many were already seeing big gains in sales volume and median home values, and the O-Zone designations just helped push them along.
Their list of top O-Zone neighborhoods appears to be dominated by neighborhoods in New York City, including the top-ranking neighborhood of Brooklyn Heights. The Wayne State neighborhood in Detroit ranked second. There’s one in New Orleans that ranked third. Nashville has a neighborhood in the fourth-ranking position. Then you see several neighborhoods in New York and other cities and states.
(1) Zillow Article 1
(2) Zillow Article 2
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