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Last updated on Feb 19, 2023
6 min read

Opportunity Zones in California: What You Need to Know

As the most populous state in the Union, California is ripe with Opportunity Zones— and opportunities to invest in them. While the largest Opportunity Zones in the state are located far inland, there are still Opportunity Zones in some of the state’s most densely populated areas, such as Los Angeles and San Diego Counties. For those who are unfamiliar, the Opportunity Zones Program is a federal tax incentive program created by the Tax Cuts and Jobs Act of 2017

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In this article:
  1. California Opportunity Zones Guide
  2. The Best Opportunity Zones in California
  3. Los Angeles: DTLA, The Arts District, and Koreatown
  4. Additional State Financing Programs Provide Additional Incentives for California Opportunity Zone Investors
  5. California Recycle Underutilized Sites (CALReUSE) Program Offers Public Financing for Brownfield Sites
  6. The Low Income Investment Fund (LIIF) Provides Capital for Low Income Housing in California
  7. California High Speed Rail Project Could Bring Visitors to Opportunity Zones
  8. Related Questions
  9. Get Financing

California Opportunity Zones Guide

The Opportunity Zones Program is a federal tax incentive program created by the Tax Cuts and Jobs Act of 2017. It allows those who invest in one of the 8,700 low-income areas designated as Qualified Opportunity Zones (QOZs) to defer their capital gains taxes until December 31st, 2026, provided they invest within 180 days of the sale of their assets. In addition:

  • Investors who hold Opportunity Zone (O-Zone) investments for at least 5 years before December 31, 2026 will enjoy a 10% reduction in their capital gains tax basis.

  • Investors who hold their O-Zone investment for at least 7 years before December 31, 2026 will enjoy an additional 5% reduction in their capital gains tax basis, for an overall 15% reduction.

  • Investors who hold their Opportunity Zone investment for at least 10 years will not have to pay any capital gains taxes on any additional appreciation generated by the investment.

Source: California Demographic Research Unit

To gain the benefits of this program, an investor must place their money in an Opportunity Fund, a special investment vehicle designed to take advantage of the O-Zones program. Opportunity Funds must keep at least 90% of their assets in a QOZ, and will be tested twice a year by the Treasury. Opportunity Funds can self-certify; they do not need approval from any government entity. Eligible investments include:

  • The purchase of real estate located inside an Opportunity Zone, which must either lead to new building construction or the substantial rehabilitation of a building within 30 months of purchase.

  • The purchase of stock in an eligible company. To be eligible, a company must not be in a prohibited industry (i.e. gambling, massage parlors, liquor stores), and must have at least 70% of its tangible assets located inside an Opportunity Zone. It must also conduct at least 50% of its business inside an Opportunity Zone. Businesses must continue to keep pace with these requirements for the duration of the Opportunity Fund investment.

The Best Opportunity Zones in California

As the most populous state in the Union, California is ripe with Opportunity Zones— and opportunities to invest in them. While the largest Opportunity Zones in the state are located far inland, there are still Opportunity Zones in some of the state’s most densely populated areas, such as Los Angeles and San Diego Counties.

Los Angeles: DTLA, The Arts District, and Koreatown

Downtown LA (DTLA), and in particular, the LA Arts District, is one of the fastest growing urban areas in Los Angeles County, which itself is third-largest metropolitan economy in the world, with a gross domestic product of nearly three quarters of a trillion dollars per year. Much of DTLA is located within Opportunity Zones, providing a promising opportunity for investors looking to enter the market.

In addition to Downtown LA, Koreatown is another fast-growing neighborhood in Los Angeles, nearly all of which is inside a QOZ. From 2012 to 2019, residential real estate prices in the area nearly doubled, with the average home value jumping from $333,000 to $637,000, which has greatly increased demand for multifamily rentals, as many individuals and families are priced out of homeownership.

Source: California Metropolitan Transportation Commission

San Francisco Bay Area: Oakland, Cupertino and San Jose

While San Francisco itself is mostly excluded from Opportunity Zones due to its incredibly high incomes, several nearby cities, including Oakland, Cupertino, and San Jose are host to multiple QOZs. Oakland itself is a particularly promising investment area, as home values have increased nearly 240% since 2012, going from $309,000 to $734,000. Much like Koreatown in Los Angeles, this is increasing demand for multifamily rentals, as well as the demand for commercial real estate in the area.

In San Jose, home values have also skyrocketed over the last 7 years, with an increase from $487,000 to $1.07 million between 2012 and 2019, making this a similarly enticing market for Opportunity Fund investors.

Additional State Financing Programs Provide Additional Incentives for California Opportunity Zone Investors

In addition to the standard benefits of the Opportunity Zones program, several California state government programs provide additional incentives for specific types of development, which Opportunity Funds may wish to use to increase leverage and gain access to low-cost commercial real estate financing. Typically, these developments will need to undergo an application process, and must provide benefits to the public, such as affordable housing or redeveloping brownfield sites.

California Recycle Underutilized Sites (CALReUSE) Program Offers Public Financing for Brownfield Sites

The California Recycle Underutilized Sites (CALReUSE) program offers public financing to help remediate and redevelop brownfield sites to help create housing and encourage other types of community development. The program has led to $3.7 billion of private and public housing investments, and the development of over 7,200 housing units, including approximately 3,600 affordable units. To do this, CALReUSE provides forgivable loans and grants, which can help fund both remediation and construction costs for development projects. Since many of these brownfield sites are located in Qualified Opportunity Zones (QOZs), the program could easily help Opportunity Funds redevelop these sites to create profitable developments with a high level of community impact.

The Low Income Investment Fund (LIIF) Provides Capital for Low Income Housing in California

The Low Income Investment Fund (LIIF) is an organization committed to creating more opportunities and a better quality of life for low income communities. LIIF provides financing for a variety of community development initiatives through its revolving loan fund. In addition, LIIF is working on providing loans to increase the energy efficiency of affordable multifamily developments. Opportunity Funds investing in affordable housing or other types of development that might benefit low-income communities may wish to look into partnership opportunities and financing opportunities with LIIF.

California High Speed Rail Project Could Bring Visitors to Opportunity Zones

Right now, the California High-Speed Rail Authority is developing and planning a high speed rail project that will traverse the state. The 800 miles will go from San Francisco to San Diego, and many of the stops will take visitors into or close to Opportunity Zones. Understanding these plans, and co-ordinating with city governments and other Opportunity Funds could provide Opportunity Fund managers the ability to make smarter investment choices and increase profits, while helping create more sustainable community development.

See also: Opportunity Zones in Florida, Opportunity Zones in Texas

Related Questions

What are Opportunity Zones in California?

Opportunity Zones in California are census tracts that have been nominated by the governor of California to become Opportunity Zones. In order to qualify, potential Opportunity Zones must have a minimum poverty rate of 20%, as well as a median income of no more than 80% of the statewide median family income (for rural areas), or no more than the greater of 80% of the statewide median family income or 80% of the median family income for that metropolitan area. No more than 25% of census tracts in each of these qualified areas can be nominated. Another 5% of the census tracts in a qualifying area may also be eligible, given that they adjoin a current Opportunity Zone, and that the median family income in the area is not more than 125% of the median family income in the adjoining Opportunity Zone. Source and Source.

What are the benefits of investing in Opportunity Zones in California?

The Opportunity Zones program was created as a result of the Tax Cuts and Jobs Act of 2017, and was designed to stimulate investment in some of the lowest-income communities throughout the United States. The Opportunity Zones program permits individuals to defer eligible capital gains until December 31, 2026, provided that they invest in an Opportunity Fund, a specialized financial vehicle that must place at least 90% of its assets in commercial real estate or qualified businesses within one of America’s 8700 census tracts designated as Qualified Opportunity Zones.

In addition, investors can take advantage of a 10% reduction in their capital gains tax basis, provided they hold their investment for a minimum of five years before December 31, 2026. Investors may utilize a further 5% reduction in their capital gains tax basis if they hold the investment for a minimum of seven years.

The benefits of investing in Opportunity Zones in California are the same as investing in Opportunity Zones anywhere in the United States. Investors can defer capital gains taxes until they sell their investment or by December 31, 2026, whichever occurs first. In addition, investors who keep their money in an Opportunity Fund for at least 5 years will receive a 10% reduction of their capital gains tax liability, while those who keep their investment in the fund for at least 7 years will receive an additional 5% discount, for a total 15% capital gains tax discount. And, in what may be the most appealing element of Opportunity Fund investing, investors who keep their money in an Opportunity Fund for at least 10 years will not have to pay any capital gains taxes on any additional appreciation their investment has experienced since it was placed in the fund.

What types of investments qualify for Opportunity Zones in California?

In California, investments in commercial and multifamily real estate, as well as businesses that are not in a prohibited category, qualify for Opportunity Zones. To be eligible, a property must either be new construction, or if it is a rehabilitation project, the Opportunity Fund must invest equal or greater funds into property improvements than it did to initially purchase the property. However, a recent regulatory ruling posits that this only applies to the cost of the building, not the cost of the land. For instance, if an Opportunity Fund invested $1 million into an outdated apartment building, and it was found that the building was worth $600,000, while the land was worth $400,000, the Opportunity Fund would only need to invest $600,000 into property improvements, not the full $1 million. In addition, all construction or rehabilitation projects must be completed within 30 months. Prohibited business categories include liquor stores, massage parlors, gambling-related businesses, golf courses, tanning salons, and several other types of “sin” businesses. Despite this, an Opportunity Fund can generally own property that is being leased to these businesses, they just cannot own shares in these types of businesses themselves. Plus, the business must do at least 70% of its business inside the Opportunity Zone in order to qualify.

For more information, please see this article and this article.

What are the tax incentives for investing in Opportunity Zones in California?

Investors must invest through an Opportunity Fund in order to qualify for the tax incentives offered by the Opportunity Zones program. If an investor keeps their money in an Opportunity Fund for at least 5 years prior to December 31, 2026, they will reduce their deferred capital gains tax liability by 10%, while if they keep funds in for seven years before that date, they can reduce their tax bill by 15%. In some cases, investors may even reduce their tax liability to zero on any profits they generated by investing in an Opportunity Fund, though they will need to hold their investment in the fund for at least 10 years in order to qualify.

In order to qualify for the tax incentives, potential Opportunity Zones must have a minimum poverty rate of 20%, as well as a median income of no more than 80% of the statewide median family income (for rural areas), or no more than the greater of 80% of the statewide median family income or 80% of the median family income for that metropolitan area.

For more information, please visit this guide to the Opportunity Zones Program and this glossary of Opportunity Zones in Commercial Real Estate.

How do I find an Opportunity Zone in California?

You can find Opportunity Zones in California by searching the U.S. Treasury's Opportunity Zone Map. This map allows you to search for Opportunity Zones by state, county, or zip code. You can also find a list of Opportunity Zones in California on the California Community Opportunities website. This website provides a list of all the Opportunity Zones in California, as well as information about the types of investments that are eligible for the program.

What are the risks associated with investing in Opportunity Zones in California?

Investing in Opportunity Zones in California carries the same risks as any other real estate investment. These include market risk, tenant risk, and the risk of not being able to sell the property at a profit. Additionally, investors should be aware of the potential for changes in the Opportunity Zones program, as the program is still relatively new and could be subject to changes in the future. Investors should also be aware of the potential for fraud or other illegal activities, as with any real estate investment.

For more information on the Opportunity Zones program, please see A Guide to the Opportunity Zones Program for Commercial and Multifamily Real Estate Investors and Opportunity Zones in Commercial Real Estate.

In this article:
  1. California Opportunity Zones Guide
  2. The Best Opportunity Zones in California
  3. Los Angeles: DTLA, The Arts District, and Koreatown
  4. Additional State Financing Programs Provide Additional Incentives for California Opportunity Zone Investors
  5. California Recycle Underutilized Sites (CALReUSE) Program Offers Public Financing for Brownfield Sites
  6. The Low Income Investment Fund (LIIF) Provides Capital for Low Income Housing in California
  7. California High Speed Rail Project Could Bring Visitors to Opportunity Zones
  8. Related questions
  9. Get Financing
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