Opportunity Zone investments in Puerto Rico can revitalize depressed area

https://caribbeanbusiness.com/opportunity-knocks-for-whom

Opportunity Knocks For Whom?

By on February 28, 2019

Editor’s note: The following originally appeared in the Feb. 28 – March 6, 2019, issue of Caribbean Business.

“Opportunity Zone fever” appears to be moving across Puerto Rico but it looks like it is only benefiting outside investors because the local Legislature has yet to pass a law so local investors will also reap the benefits of such federal designations.

There are more than 8,700 areas in the United States that were designated Opportunity Zones by the Treasury Department in the Tax Cuts & Jobs Act of 2017, including virtually all of Puerto Rico. An Opportunity Zone is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. The Qualified Opportunity Zone designation remains in effect for 10 years, according to Francisco Luis, a tax partner at Kevane Grant Thornton.

The federal law is meant to encourage investors to reinvest their capital gains, which can come from any investment, whether stocks, bonds, real estate or partnership interests. Investors must invest their capital gains in an Opportunity Fund Zone within 180 days of receiving those gains. The money cannot be invested directly into a property, and funds must invest 90 percent of their capital in Opportunity Zone properties.

At a recent investment summit, Luis said investors can qualify for three types of incentives. The first is a “temporary deferral” of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity investment is disposed of, or Dec. 31, 2026. The second incentive is a permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Zone if it is held for at least 10 years. This exclusion only applies to the gains accrued after the investment in an Opportunity Zone.

The third incentive is a step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10 percent if the investment is held for at least five years, and by an additional 15 percent if held for at least seven years, thereby excluding up to 15 percent of the original gain from taxation.

He said that if an eligible taxpayer realizes $1 million in capital gain, timely invests the gain in an Opportunity Zone and sells the Opportunity Zone interest within five years, then the $1 million gain must be recognized in the year of the sale of the qualified interest. If the interest is held for at least five years, then 10 percent of the gain may be excluded, representing $100,000 tax-free. If the interest is held for two additional years, another $50,000 (or 5 percent) may be excluded, for a total tax-free gain of $150,000.

Dennise Flores, a tax partner at PricewaterhouseCoopers, said most of the interest in Opportunity Zones has come from real-estate firms. However, she said retailers, hospitals and manufacturers have joined the fray. “I already have two private-equity firms investing in the hospitality arena,” she said.

What about nontraditional investors interested in Opportunity Zones? Flores said if they are Puerto Rico residents, “the bill in the Legislature needs to be approved. We need to replicate the same rules. That has not happened yet.”

The legislation has been in conference committee since November, according to the Office of Legislative Services.

Who are the ones benefiting? Acts 20 and 22 investors, for the most part, which now have the additional incentive to invest. In the area of San Juan’s Santurce district, developers have already acquired some distressed properties…, raising some concern that Opportunity Zones may further marginalize low-income residents and drive them away.

Margaret Anadu, managing director and head of Urban Investment Group at Goldman Sachs, said the firm has put about $8 billion in funding projects into struggling neighborhoods across the U.S. and about $5 billion has been in Opportunity Zones. “These have been in places that are starving for capital and are not going to change overnight,” she said.

 

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