The creation of opportunity zones by the erstwhile Trump administration is the most significant change in NNN real estate since 1031 and 1033 exchanges were allowed. Opportunity zones cover over 25 million people in identified opportunity zones in nearly 50 states and number over 7,000 in all types of locations. To be eligible for this favorable tax treatment, the net lease investment must bring new business to the zone that creates jobs or expands opportunities, and, improve the lives of those living in the opportunity zone by either improving the availability, aesthetics, and value of the zones’ housing options. There are amazing tax breaks for triple net lease investors! A 15% discount off initial taxes by virtue of a 15 percent step-up in basis equal to an initial gain which comes on top of deferring.an initial tax liability until Dec. 31, 2026. Consider an Opportunity Zone investment when deciding to reinvest sales proceeds into another investment. 1031 exchanges work to keep NNN assets for a long time. If these net lease assets have appreciated and you’d like to dispose of them now or in the next few years, use an opportunity zone NNN investment instead. And also, If a capital gain is reinvested into an opportunity zone, and held for at least 10 years, any appreciation is not taxable upon divestment!
Current regulations do not relax the treatment for triple-net leased property. In order to qualify for these tax benefits, a landlord must be engaged in the “active conduct of a trade or business.” While merely having a tenant with a NNN lease may not disqualify a property, it is an issue to be worked around. For example, a landlord constructs a strip center, which is occupied by a single tenant with a triple-net lease and contains an office of the landlord. In this example, the landlord will fail to meet “active conduct” requirements.
Or let’s say, a landlord constructs a retail building in which one floor is leased on a triple-net lease and the other two floors are not. The landlord has an office in the building with employees who support tenants that are NOT leasing on a NNN basis. In this case, the landlord will pass muster. Further, Opportunity Zone NNN investments must be made into net lease property that is “original use” to an investor. Property that was involuntarily transferred to local government control qualifies. Property that was vacant one year before the Zone was designated also qualifies as original use.
This is how an NNN investor might choose to time their investment in an Opportunity Zone. An investor reinvests a realized capital gain within 180 days into a Opportunity Zone thus, defers the gain until divestment. The investor qualifies for a Section 162 business meeting investing vehicle guidelines. Then, the investor can exclude 10% of the original deferred gain, after 5 years. After 10 years, the NNN investor can divest from the Opportunity Zone, at which point the taxpayer will owe NO taxes on the new capital gains. Note, that any remaining deferred gains are carved on December 31, 2028. In year 12, another additional 5% of the original deferred gain is also excluded.
To reiterate, as part of the Tax Cuts and Jobs Act, the opportunity zone provision is designated to encourage investment and economic growth in economically distressed communities, Section 1400Z-2 allows an NNN investor: temporary deferral of capital gains; partial exclusion of previously deferred gains; and permanent exclusion of post-acquisition gains from the sale of an investment, held more than 10 years.
Find Opportunity Zone access via an interactive map that provides details about significant transportation-related facilities, such as highway exits, train stations, and bus stops, that are located in or near Opportunity Zones. Final Opportunity Zone regulations were released in December 2020 and the IRS also released a FAQ document. The rules of the Opportunity Zone program are complex, with confusing deadlines and requirements. Call your expert brokers at the Triple Net Investment Group for stellar guidance on Opportunity Zone NNN deals that will perfectly meet your investment criteria.