For all the debate about the Trump 2017 Tax Reform, the creation of the Opportunity Zone Program could be an engine for economic development in low income communities. The goal of the program is to encourage investment of deferred capital gains into pooled funds which would then be invested in state designated, federally approved Opportunity Zones. Last week, Florida Senator Marco Rubio and South Carolina Senator Tim Scott (both Republicans) were in Miami to promote Governor Rick Scott’s newly designated Opportunity Zones. On their tour, Senators Rubio and Scott did a good job of preaching the potential benefits of the Opportunity Zones and what the investments could bring. But they did not explain the long process it will take to bring the dollars to the community or any potential pitfalls.

The program works similar to 1031 tax free exchanges. Taxpayers can defer long term capital gains if the capital gain portion of a sale is reinvested in a Qualified Opportunity Fund (a 1031 exchange requires that ALL net sales proceeds, gain and principal, be reinvested in a replacement property). A Qualified Opportunity Fund is an investment vehicle that is organized as a partnership or corporation for the purpose of investing in an Opportunity Zone. A designated Opportunity Zone is a census tract with a poverty rate of 20 percent or a median family income lower than 80% of the area average.

State governors were to nominate up to 25% of the eligible low income tracts as Opportunity Zones by March 21, 2018. Florida received an extension until April 20, 2018 and on April 20, Governor Scott nominated 427 areas, 25% of those eligible, for designation. The Treasury Department has 30 days to make the designation and when it does, the designation will be for 10 years.

The benefit to the taxpayer is a step up in basis. If the investment is for 5 years, the step up is 10%. If the investment is another 2 years, the taxpayer receives another 5% step up. On December 31, 2026, the tax payer will recognize the remaining deferred gain.

As Opportunity Zones are created and funded and investors create projects in Opportunity Zones, development should jump start in these low income areas – perhaps more quickly then would have occurred without this program. At least that is how Senators Rubio and Scott spun the program. And, it is a good thing any time dollars are targeted for development, particularly in low income neighborhoods. Obviously, for those of use in the real estate industry, more capital should mean more activity for all of us.

However, private dollars as well as state and local dollars are often already targeted in these same areas. In some cases, these efforts have had some success. In others, the successes are hard to find. Pumping money into any area, private or government, doesn’t work unless there is a plan. The local government has to be willing, and able, to work with developers to approve projects through its zoning code and permitting process. There has to be a vision and a master plan in place and the local governments must offer incentives to start up and small businesses to assure that there are essential non-governmental services (and governmental services) for the residents that are targeted with the new development. Otherwise, the government dollars will be wasted, or worse, go unfunded.

Opportunity Zones could truly spur meaningful growth and development. Or, they could be another case of putting the cart before the horse.

A client recently completed a 1031 exchange. The replacement property is approximately 27 acres near Tampa.  It will be a little over a year before we are ready to develop this property.  The prior owner had an agricultural exemption on the property which he maintained by giving a farmer grazing rights for his cattle.  Last week, the client asked me to prepare a new Grazing Agreement with the farmer.  “Sure”, I thought.  I was certain I had done one before.

I had to dig way back in my form files, the ones kept on CD, to find one. That got me thinking, where have all the cows gone?  It wasn’t too long ago that here in South Florida there were plenty of cows, horses, goats, sheep, emu, pigs and other livestock grazing in and around our neighborhoods.  I grew up in Hollywood and went to school in Davie.  Davie was (and still claims to be) horse county.  My school was surrounded by, and smelled like cows.

My wife and I raised our kids in Cooper City. There were pastures all around “The Coop”.  Our development was a former pasture.  It was not an uncommon site to see sheriff’s deputies corralling stray cows that had escaped their pasture.  Police cars would corner cows against fences and trees while waiting for the farmer to shepherd the cow home.  These sites were common all over South Florida for many years.  Slowly, the cows and horses moved further west and now, the farms and pastures are few and far between, limited to small, rural communities.  If you miss that life, you need to head north, towards Lake O, to Ocala and to the Panhandle.

Where have the cows gone? Open space has vanished in South Florida and my need to draft grazing agreements has long past.  The big dairy farmers have cashed out – selling their land for development.  The small open fields used for grazing or nurseries or other agricultural uses have been snatched up more recently for more small McMansion communities.  The idea of throwing a couple of cows or goats on your property to claim an agricultural exemption in South Florida is not standard practice anymore.

Is this a bad thing? Yes and no.  We certainly miss the open space.  But, it is hard not embrace the growth and progress and what the community has become and can become.  Cows do add character and I hope that we don’t loss all of our grazing areas.

President Trump is scheduled to make a big announcement about his tax plan later this week. No details have been released, but the president’s tweets about the announcements have been filled with his trademark superlatives.  One thing is for certain.  The Trump tax plan will affect real estate.  The question is, however, whether the real estate developer in chief’s proposals will benefit the real estate industry.  Signals, so far, indicate that they will even though such moves might be contrary to the president’s own tax policy.

The biggest issue affecting real estate is the mortgage interest deduction. President Trump has stated several times that he does not intend to eliminate this popular deduction for business or for homeowners.  For homeowners, supporters of the deduction have always argued that it is designed to encourage homeownership by making the cost of homes more affordable.  However, the opposite is true.  The deduction targets the wealthy who are already homeowners and, it is regressive.  It does not reach low and moderate income workers.  The National Low Income Housing Coalition supports reducing the tax break from $1,000,000 to $500,000 and changing the deduction to a credit.  This would allow 15 million more low and moderate income borrowers to get a tax break.

On the business side, the White House has also signaled that it is considering changing the rules regarding expensing (deductibility) of capital expenditures. The tentative proposal would allow the immediate expensing of capital expenditures.  Coupled with the continuance of deductibility of mortgage interest, this would allow double dipping.  A borrower could borrow large sums of money for capital improvements and deduct 100% of the cost of the improvements that same year instead of depreciating the cost over the life of the improvements.  And, the borrower could deduct the interest over the life of the loan as paid.  the cost to the federal budget under this plan would be staggering and contrary to all of the president’s stated budgetary goals.

Another real estate tax provision which could be changed in the Trump proposal, but so far, has not been discussed, is the provision allowing for “active” real estate investors to offset real estate losses against other income. President Trump has been very successful at this strategy according to the 1995 tax returns that were released to the press late last month.  Elimination of this provision would have a net positive affect on the budget.

Finally, the president has not commented on the future of 1031 like-kind exchanges. This is popular method used by real estate developers and investors which allows the deferrals of capital gains upon the sale of real property by substituting a new property upon the sale of a property.  real estate love it.

Tax reform is not an easy job. There is so much more to is than politicians and the media want us to believe or allow us to understand.  More importantly, it is so much more than setting tax rates and debating whether to continue capital gains tax.  To have meaningful tax reform, the president and Congress must look at the entire tax code and put aside their own self interests.  While selfishly, I would love to make real estate the best place to invest money from a tax stand point, it would be foolish and naïve to think that creating a separate code for real estate investors is best for our overall economy.

    Get Blog Updates

    Get news, insights, and commentary delivered straight to your inbox!
    Click Here

    About Us

    Welcome to Assouline & Berlowe’s Florida Real Estate Law and Investment Blog with news, insights, and commentary for investors, developers, and their advisors.


    Recent Updates


    Stay ConnectedLinkedIn

    Get Blog Updates
    We'll send you an email whenever we add a new post.
    Stay Updated
    Give it a try, you can unsubscribe anytime.
    Get news, insights, and commentary delivered straight to your inbox!
    Click Here