Opportunity Zones in Ohio: What You Need to Know
Ohio, as the seventh largest state in the U.S., contains many extremely promising areas for Opportunity Zones investing, and, as there are a substantial 320 Opportunity Zones distributed througout the state, investors have quite a few areas to chose from. Today, Ohio is known for industries including fuel cell and solar energy development, medical research, aerospace and defense, rubber and industrial products, and tech research and development, which are all contributing to the state’s healthy rate of economic development.
Ohio Opportunity Zones Guide
Created by the Tax Cuts and Jobs Act of 2017, the Opportunity Zones Program is a federal tax incentive program which allows investors to defer their capital gains taxes until December 31st, 2026, provided they invest in 8,700 low-income areas designated as Qualified Opportunity Zones (QOZs). To do this, they need to invest funds 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.
The Best Opportunity Zones in Ohio
Ohio, as the seventh largest state in the U.S., contains many extremely promising areas for Opportunity Zones investing, and, as there are a substantial 320 Opportunity Zones distributed througout the state, investors have quite a few areas to chose from. Today, Ohio is known for industries including fuel cell and solar energy development, medical research, aerospace and defense, rubber and industrial products, and tech research and development, making it an economic powerhouse and an ideal place for Opportunity Zone investing. In particular, some of the most promising Opportunity Zones in Ohio include:
Columbus Opportunity Zones
Source: City of Columbus, Ohio
As the largest city in Ohio and the 14th largest city in the country, Columbus grew more than 10% between 2010 to 2017, making it the fastest growing city in the Northern U.S. With 44 Opportunity Zones across Columbus, investors could gain significantly by creating or investing in Opportunity Funds here. Neighborhoods that are currently designated O-Zones include:
Eastside: parts of Whitehall, Mt. Vernon, King-Lincoln District, , Near East Side, and Franklin Park. Includes parts of Milo-Grogan, Bridgeview, Devon Triangle, Olde Towne East, the Cleveland Avenue Corridor, Framingham, and Cumberland Ridge.
Southside: Route 104 Industrial Corridor, parts of the Rickenbacker area, and the East Parsons Avenue Corridor.
Westside: Franklinton, parts of the Scioto Peninsula, , Valleyview Heights, Consumer Square West, South and Central Hilltop Westland Mall, and Lincoln Village.
Northwest: The Continent, parts of Crosswoods, and West Campus.
Cleveland Opportunity Zones
Source: Ohio Development Services Authority
The third largest city in Ohio, Cincinnati, was ranked in the top 30 fastest-growing cities in 2018, which could make it a great place for Opportunity Zone investing. Many of the city’s Opportunity Zones are located in areas with lower-cost real estate ripe for redevelopment, such as its historic West End and Over-the-Rhine neighborhoods. The West End may be of particular interest to investors, as the $200 million FC Cincinnati stadium is currently under construction and is expected to bring new jobs and a certain degree of economic revitalization to the area. Other well-known neighborhoods in the city that are fully or partially located inside O-Zones include Camp Washington, Avondale, Evanston, Bond Hill, Corryville, South Cumminsville, and North and South Fairmount.
As the second largest city in Ohio by population, the Cleveland metropolitan area actually has the largest economy of any metropolitan area in the state, at $139 billion. In addition, Cleveland is home to an incredible 64 Qualified Opportunity Zones, which are located in areas including Glenville, Tremont, Cleveland Heights, The Flats, Whiskey Island, and University Circle.
Investing in an Ohio Opportunity Fund
In order to achieve the tax benefits of Opportunity Zones, funds must be placed 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:
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.
Opportunity Funds and Low Income Housing Tax Credits (LIHTCs)
Investors who are interested in the affordable housing market may be interested in combining their Opportunity Zone investment with another popular tax credit program, the Low Income Housing Tax Credit (LIHTC), which provides investors in eligible affordable properties a dollar-for-dollar credit against their federal income taxes. The LIHTC is claimed over a 10-year period, but buildings must typically remain in compliance for at least 15 years.
There’s a limited amount of funds per state, per year for the LIHTC program, so competition for LIHTCs is fierce, but they can be a very helpful source of investment for affordable housing projects that otherwise might not get off the ground. To qualify for the LIHTC program, developers must designate a certain number of the units as affordable, which must be filled by tenants making no more than a specific percentage of the Area Median Income (AMI).
In addition to the LIHTC, other popular tax credit programs that may be used in combination with Opportunity Fund investments include the New Markets Tax Credit (NMTC), which allows investors to claim a 7-year, 39% tax credit for investing in the construction or rehab of qualified commercial properties in designated low-income areas, most of which already overlap Opportunity Zones. Another popular program is the Historic Tax Credit, or HTC, which allows investors to claim a 20% tax credit for rehabilitating qualified historic structures. Since many of Ohio’s Opportunity Zones, for instance, Cincinnati’s West End neighborhood, are home to a multitude of historic structures, this program may also be of significant interest to Opportunity Fund investors in Ohio.
What are the benefits of investing in Opportunity Zones in Ohio?
Investing in Opportunity Zones in Ohio can provide investors with three main tax benefits. First, investors may defer capital gains taxes until they sell their investment or by December 31, 2026, whichever occurs first. Second, 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. Third, investors who keep their money in an Opportunity Fund for at least 7 years will receive an additional 5% discount, for a total 15% capital gains tax discount. Finally, 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.
For more information, please see A Guide to the Opportunity Zones Program for Commercial and Multifamily Real Estate Investors and Opportunity Zones in Commercial Real Estate.
What types of investments qualify for Opportunity Zone incentives in Ohio?
In Ohio, investments in commercial and multifamily real estate, as well as businesses located in Qualified Opportunity Zones (QOZs) are eligible for Opportunity Zone incentives. To qualify, the business must not be in a prohibited category, such as liquor stores, massage parlors, gambling-related businesses, golf courses, tanning salons, and several other types of “sin” businesses. Additionally, the business must do at least 70% of its business inside the Opportunity Zone in order to qualify. For real estate investments, the 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 more information, please visit https://www.opportunityzones.help/.
What are the tax incentives for investing in Opportunity Zones in Ohio?
Investors must invest through an Opportunity Fund in order to qualify for the tax incentives offered by the Opportunity Zones program. An Opportunity Fund is a partnership or corporation which plans to invest a minimum 90% of its assets in Opportunity Zones. Opportunity funds permit investors to avoid paying taxes on recent capital gains until December 31, 2026.
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 addition, it’s important to realize that Opportunity Funds can self-certify, meaning that they do not specifically need to be approved by the government.
For more information on the tax incentives for investing in Opportunity Zones in Ohio, please refer to the Ohio Department of Taxation's 2019 IT 1040 Instructions.
What are the eligibility requirements for investing in Opportunity Zones in Ohio?
In order to invest in Opportunity Zones in Ohio, the 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. Additionally, the business must do at least 70% of its business inside the Opportunity Zone in order to qualify. This rule has caused serious concern for many Opportunity Funds, and is part of the reason why most initial O-Zone investments have gone toward commercial and multifamily real estate, not businesses. For an Opportunity Fund to invest in a business, the business must not be in a prohibited category. 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. Source
In general, most experts believe that it’s not worth investing in an Opportunity Fund unless you have a minimum 10-year investment horizon. This way you can take full advantage of all of the tax benefits of Opportunity Fund investing. Therefore, if an investor is elderly, in poor health, or may need to use their funds within a few years, investing in an Opportunity Fund may not be the best choice. For commercial or multifamily real estate investors who wish to start their own Opportunity Fund, it’s generally recommended that they have at least $1 million in assets to invest. Otherwise, the operational and administrative costs of opening a fund may negate the potential tax benefits. Source
How do I find out more information about Opportunity Zones in Ohio?
You can find more information about Opportunity Zones in Ohio by visiting the interactive Opportunity Zones Map created by the Economic Innovation Group (EIG). This map provides detailed information about the Opportunity Zones program, including the locations of Opportunity Zones in Ohio.
What are the risks associated with investing in Opportunity Zones in Ohio?
Investing in Opportunity Zones in Ohio carries the same risks as investing in any other real estate investment. These risks include market volatility, tenant turnover, and the potential for natural disasters. Additionally, investors should be aware of the potential for changes in local, state, and federal regulations that could affect their investments. For example, the Ohio Opportunity Zone program is subject to the same federal regulations as other Opportunity Zone investments, and any changes to those regulations could affect the tax benefits associated with investing in Ohio Opportunity Zones.
It is also important to note that Opportunity Zone investments are long-term investments, and investors should have a minimum 10-year investment horizon in order to take full advantage of the tax benefits. Therefore, investors who may need to use their funds within a few years should consider other investment options.
Finally, investors should be aware of the operational and administrative costs associated with opening an Opportunity Fund. Generally, it is recommended that investors have at least $1 million in assets to invest in order to make the costs of opening a fund worthwhile.