Are Qualified Opportunity Zones Favorable for Self Storage Investment?

By now, most commercial real estate investors have heard the term “Qualified Opportunity Zone,” even if they aren’t fully aware of the advantages this program provides. Qualified Opportunity Zones (QOZ) exist in financially distressed communities to foster economic growth and improve neighborhoods, while delivering incentives in the way of under market properties and preferential tax benefits to investors. 

 

The IRS defines a Qualified Opportunity Zone as “an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.  Localities qualify as QOZs if they have been nominated for that designation by a state, the District of Columbia, or a U.S. territory and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service (IRS).”

 

Qualified Opportunity Zone Benefits for Self Storage Investment

Storage properties in Qualified Opportunity Zones can be difficult to locate. If a storage investor is fortunate enough to find one, proper due diligence is a must. The site should be a truly reliable opportunity that will enhance investment goals. 

To invest in a Qualified Opportunity Zone, you must create a Quality Opportunity Fund (QOF). It can be a partnership or corporation or a limited liability company that is treated as a partnership or corporation for tax purposes. It is recommended that you use an attorney or CPA that is experienced in the process of establishing an opportunity fund. 

 

How to Qualify for Tax Incentives 

According to James de Gorder at radius+, investors must meet certain criteria to qualify for tax incentives.Details of the criteria and edge cases can be referenced in the IRS guidance documentation.

Capital requirements:

  • Only capital gains can be deferred, not ordinary income
  • Capital gains can come from any taxpayer including a REIT
  • All capital gains are eligible assuming they would be otherwise recognized
  • Capital must be invested in a QOZ property within 180 days of sale (31 months if a written plan consistent with ordinary business is in place and the business complies with it)

Qualified Opportunity Fund (QOF) requirements:

  • Self certify using Form 8996
  • QOFs must invest 90% of their assets in a QOZ property
  • Eligible interest in QOF must be equity

Property requirements:

  • Must be purchased after December 31st, 2017
  • Must be purchased in a QOZ
  • The original property use in the QOZ commences with the QOF or the QOF substantially improves the property

 

 

The primary reason for investing capital gains with a QOF is to defer capital gains tax for 5 – 10 years or the sale of the QOF investment; whichever comes first. By deferring capital gains tax investors can increase their purchasing power in the QOF investment.

As you can see, the longer you hold your investment, the higher your exclusion of deferred gain from income.

QOF investment held for:

  • 5 Years – investor may exclude 10 percent of the deferred gain from income
  • 7 Years – investor may exclude 15 percent of the deferred gain from income
  • 10 Years – gain on the qualifying investment in the QOF may be excluded from income

 

Opportunity Zone investment is far more complex than the information provided in this concise article. This is merely an outline of the way self storage investors can benefit from the potential that exists in these areas while encouraging economic growth, creating jobs, and improving neighborhoods.

 


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