Opportunity Fund Investing in Texas: The Basics
Texas, the second largest state in the U.S., has 628 designated Opportunity Zones, making it one of the most promising areas for Opportunity Fund investing in the entire country. Texas has O-Zones located in or near all of its major urban areas, including Austin, Houston, Dallas, and San Antonio. The median household income of Texas’s Opportunity Zones is $36,268, compared to the median income of $57,547 for all census tracts in the state. In addition, 70.22% of Texas’s Opportunity Zones are located in a metro area, compared to 85.58% of all census tracts statewide.
What are the Opportunity Fund Tax Benefits in Texas?
Just like in other states, the Opportunity Zones program offers investors a way to defer their federal capital gains taxes by investing in Opportunity Funds, specialized investment vehicles which must place at least 90% of their assets in eligible businesses or real estate inside a Qualified Opportunity Zone (QOZ). In order to be eligible for investment, a company must do at least 50% of its business inside a QOZ. And, for a property to be eligible, an Opportunity Fund must be engaging in new construction, or must be investing more into rehabilitating the property than it invested to purchase the property in the first place.
Opportunity fund investors who invest within 180 days of selling an asset can defer paying capital gains taxes until April 2027. If they keep their investment for at least 10 years, they can enjoy a 15% discount on their capital gains tax liability, as well as paying zero capital gains taxes on any appreciation their investment has made since entering the Opportunity Fund.
Opportunity Fund Investments Can Be Paired With Texas Historic Tax Credits
Much like the Federal Historic Tax Credits (HTC) program, Texas has its own historic tax credit program, which was signed into law by Governor Rick Perry in 2013. The program allows investors a credit of up to 25% of eligible costs incurred when rehabilitating a historic building. This credit can be used against state franchise taxes, and can actually be used, saved, and/or spread out over up to five future state franchise tax bills, giving it unprecedented flexibility. In theory, this historic tax credit could be used with federal historic tax credits to maximum investment yields when rehabilitating property owned by an Opportunity Fund.
Other tax credit programs that can be paired with Opportunity Fund projects include the Low Income Housing Tax Credit (LIHTC), designed for affordable housing properties, and the New Markets Tax Credit (NMTC), designed for commercial property in specifically distressed census tracts (most of which overlap Opportunity Zones).
The Texas Enterprise Zone Program May Also Be Leveraged With The Opportunity Zone Program
The Texas Enterprise Zone Program (ZEP) is a tax refund program intended to increase job creation and economic activity in lower-income areas of the state. While Opportunity Funds purely investing in commercial and multifamily real estate typically would not be eligible, if an Opportunity Fund were also to invest in job-creating local businesses, the company would be able to take sales tax refund, which could positively impact its profitability. In order to qualify, a business does not necessarily need to be located in an Enterprise Zone, (though it does make it easier). Fortunately, however, many Enterprise Zones overlap Opportunity Zones.