Downtown Houston’s tallest residential development, The Preston, will begin construction in March and completed in 2020. Specifically, this 373-unit luxury tower is being funded by a Qualified Opportunity Zone fund.
The project falls in line with Downtown Houston’s goal of becoming increasingly more residential. Over the past few years, the number of Downtown residents has more than doubled, from about 3,800 residents in 2013 to over 9,000. Downtown Houston wants to see that number grow even more, more than tripling to 30,000 in the next two decades.
Generally, the construction of this new property in this Qualified Opportunity Zone (QOZ) will offer Hines big tax benefits. Created by the 2017 Tax Reform Reconciliation Act (the Act), Opportunity Zones aim to promote investments in certain economically distressed communities.
In order to invest in OZs (Opportunity Zones), investors must invest in O-Funds (Opportunity Funds). These funds are the designated O-Zone investment vehicles. By investing in a variety of investment vehicles through the Opportunity Zone Program, investors can inject capital into low-income communities which promotes long term economic growth.
Benefits of Opportunity Zones
Below is an outline of specific tax benefits investors receive from Opportunity Zones:
- Deferred Capital Gains Tax – In the Opportunity Zone Program, almost all capital gains qualify for deferral. To qualify for deferral: the amount of a deferred capital gain must be invested in a Qualified Opportunity Fund. This must be an entity which is treated as a partnership or corporation. Other
- The O-Fund must hold at least 90 percent of assets in Qualified Opportunity Zone property.
- Elimination of up to 15% of the tax on the capital gain that is invested in the qualified opportunity fund, and
- Potential elimination of tax when exiting a qualified opportunity fund investment.
- Basis Step-Ups (increased rolled-over capital gains):
- A 5-year O-Funds holding = a 10% basis step-up
- A 7-year O-Funds holding = an additional 5%
- 15% total basis steps-ups
- Tax Exempt Potential – Hold O-Funds investment for 10 years or more. They grow tax-free without paying capital gains.
- Fewer Limits – No limits on the amount invested in O-Funds, the type of avoidable taxes, the total amount of taxes you avoid, and the time frame within which gains can compound tax-free.
Learn More About Qualified Opportunity Zones in Houston
To learn even more about QOZs in Houston and throughout Texas, read Lumicre’s Opportunity Zone Fund Guide for Texas. In addition, if you have specific questions about investing in Houston commercial real estate, Contact Us today.
Further Reading:
IRS Opportunity Zone FAQ sheet
https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions