Arizona Opportunity Zones

The local real estate press has recently been abuzz about the newly designated Opportunity Zones in Arizona. This is a federal program that allows state governors to nominate specific Census tracts for inclusion. Governor Ducey nominated a number of Arizona tracts in March which were approved in April, and Arizona became one of the early states to have its nominated zones recognized by the program.

A post at www.azcomerce.com outlines the tax advantages for investments in designated Opportunity Zones:

Investments held 10 years: taxable amount of the capital gains reinvested is reduced by 15% and no tax is owed on appreciation. For example: $100 of capital gains is reinvested into an Opportunity Zone fund and held for 10 years. Tax owed on the original $100 is deferred until 2026, and taxable amount is reduced to $85 ($100 minus $15). Investor will owe $20 of tax on the original capital gains (23.8% of $85). No tax is owed on Opportunity Zone investment’s capital gain. Assuming a 7% annual growth rate, the after-tax value of the original $100 investment is $176 by 2028.

Investments held 7 years: taxable amount of the capital gains reinvested is reduced by 15%. For example: $100 of capital gains is reinvested into an Opportunity Zone fund and held for 7 years, selling in 2025. Taxable amount is reduced to $85 ($100 minus $15). Investor will owe $20 of tax on the original capital gains (23.8% of $85). Assuming a 7% annual growth rate, the investor will owe $15 in tax (23.8% of $61) on the Opportunity Zone investment’s capital gain.

Investments held 5 years: taxable amount of the capital gains reinvested is reduced by 10%. For example: $100 of capital gains is reinvested into an Opportunity Zone fund and held for 5 years, selling in 2023. Taxable amount is reduced to $90 ($100 minus $10). Investor will owe $21 in tax on the original capital gains (23.8% of $90). Assuming a 7% annual growth rate, the investor will owe $10 in tax (23.8% of $40) on the Opportunity Zone investment’s capital gain.

But the question everyone is asking is, “How does this affect land investment strategies?”

It’s too early to tell exactly, but you can be sure it will affect them. It will increase demand for and therefore the value of property in those designated zones.

The program requires funds to be invested through “Opportunity Funds”, but, as reported by the Phoenix Business Journal (paywall), the U.S. Treasury Department hasn’t yet provided the necessary guidance as to how exactly those funds will operate.

Arizona Land Partners will follow this issue closely. We’ll be including Opportunity Zone benefits in our calculus when deciding which properties to purchase. I’m confident this doesn’t mean there won’t be deals outside of those zones, but it definitely impacts the mix of factors to consider as we seek the best returns on our capital.

Map of Arizona Opportunity Zones