An increasing number of new real estate funds target opportunity zones

Real estate fund sponsors are lining up to capture private equity poised to flow into new Opportunity Zones created by the Tax Cut and Jobs Act.

The basic premise behind the Opportunity Zones initiative was to offer incentives in the form of deferred and reduced taxes on capital gains to attract private capital for investment in low-income urban, suburban and rural areas of the country. “The simple thought was that if capital was invested in those zones, it would have an appreciable and beneficial effect on those communities,” says John W. Gahan III, an attorney in the real estate department at Sullivan & Worcester in Boston.

What is stirring excitement among both sponsors and investors is that, unlike 1031 tax deferred exchanges, this tax incentive is not just for “like-kind” assets. It allows investors who are selling a variety of assets, such as stocks, art or a business, to reinvest capital gains in Opportunity Zone funds. Some industry estimates put the value of total unrealized gains in the U.S. in the trillions. So, even if a fraction of those dollars finds their way into Opportunity Zone property funds, it has the potential to create a sizable new sector within the real estate investment market.

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