Mention "tax havens'' and what often comes to mind are rich little countries with discreet, friendly bankers. But the Tax Cut and Jobs Act of 2017 created what amount to thousands of tax havens in the Tampa Bay area and the rest of the United States.
They're called Opportunity Zones and they will provide potentially huge tax savings for investors while creating thousands of jobs.
"It's kind of a hidden gem in the tax act,'' said Stephen Looney, an Orlando lawyer and expert in tax law. "Not a lot of attention has been paid to it.''
Here's how it works: If you make a profit on the sale of real estate, stocks or other investments, you can defer the capital gains tax by reinvesting the amount of the gain in an opportunity zone. If you hold the investment for five years, the tax is reduced 10 percent. If you hold it seven years, it's reduced another 5 percent for a total reduction of 15 percent. As an example, you would pay taxes on just $85,000 of a $100,000 investment at the end of seven years.
"The tax benefits are what's going to motivate you to invest in a zone,'' Looney said.
The idea — hatched during the Obama Administration and embraced by President Donald Trump — is to revive low-income neighborhoods through the construction of housing, hotels and other projects that will put people to work. While the Tampa Bay Rays were considering a move to Tampa, Ybor City was designated an Opportunity Zone so construction of a stadium could have been financed in part by money from investors seeking to defer capital gains taxes.
The four-county Tampa Bay area has a total of 67 opportunity zones, including several near booming downtown St. Petersburg.
"Our downtown is spreading out and as long as the economy holds up, I think there's going to be development in areas where there hasn't been before,'' said R. Donald Mastry, a St. Petersburg real estate lawyer.
So far, little has happened.
"The developers tell me there are plenty of people with money to invest but they are having trouble finding projects that are profitable and making economic sense,'' Mastry said.
Robert Stern, a Tampa real estate lawyer, has seen more activity.
"I have clients that have put property under contract so they can purchase at the opportune time,'' he said. "The tax advantages are so tremendous and so encouraging that the larger clients are investing time and capital to get ready to participate. But everybody is waiting for a little more clarity and direction from the feds.''
In June, the U.S. Treasury Department published its list of approved opportunity zones, based on nominations by governors in all 50 states. Florida has 427 zones; each of the 67 counties has at least one.
"Florida has been one of the more aggressive states,'' said lawyer Michael Minton, chair of the Florida Bar's tax section. "There are a lot of very small, postage-stamp zones.''
In October, treasury officials issued the first round of regulations governing investments in the zones. Those were "very friendly to taxpayers,'' Minton said. The second and third rounds have been delayed, partly because of the 35-day government shutdown in the winter.
Minton and Looney, colleagues at the law firm Dean Mead, held a seminar on opportunity zones at the recent "Lay of the Land'' real estate conference in Osceola County. It drew hundreds of farmers, ranchers and other landowners. Many hope that future regulations will allow for investments in agricultural land as well as in buildings.
The regulations issued so far address "largely brick and mortar projects,'' Minton said. "We hope it can be for things like growing hemp and substantially improving land by putting in irrigation systems or bedding for perennial crops.''
Florida lawmakers are considering bills that would legalize the farming of hemp, a member of the cannabis family that doesn't produce the "high'' of marijuana. Used in textiles, health foods and many other products, hemp could be a $1 billion industry in Florida, supporters say.
In the near future, though, most opportunity zone investments are apt to be in projects like multi-family housing. "Most of the clients are real-estate oriented because that's what's most familiar to them,'' Stern said.
Real estate investors have long been able to defer capital gains taxes if they buy a similar property within 180 days of selling a property. But the new tax act also allows deferral of taxes on the sale of stocks, precious metals, even antiques and artwork if the gains are invested in opportunity zones.
The investments are made through Qualified Opportunity Funds, which are set up as partnerships or corporations. The funds must keep 90 percent of their assets in the opportunity zone, and only certain types of projects are eligible for investment.
"You can distill liquor, but you can't sell it,'' Minton said. Other projects banned besides liquor stores are golf courses, country clubs, hot tub and tanning stores, and "sin businesses'' like massage parlors, race tracks and casinos.
The tax deferral part of the act expires in 2026. To be eligible for the full 15 percent tax break, investments need to be made this year so they can be held the seven years to 2026.
The real boon in the tax act, though, comes if investors hold their interest in an opportunity zone project for at least 10 years. Then they pay no capital gains taxes when the project is sold, even if the value has increased dramatically.
Example: You sell a piece of property for $100,000 more than you paid for it. You invest your $100,000 gain in an apartment project in an opportunity zone. It is sold 10 years from now and your share of the profits is $1 million. Yet you pay no capital gains taxes even though your investment is worth 10 times what it was initially.
"It's the real crown jewel because it's a total and permanent exclusion (of taxes), not a deferral,'' Minton said.
His law firm, which has offices in Tallahassee and throughout Central Florida, has several clients forming opportunity funds and working to get projects underway this year.
"Right now they run the gamut from housing projects to manufacturing projects,'' Minton said. "I know of a number of agricultural projects that would like to take advantage (of the tax act) but they are apprehensive until we get some answers from the IRS about whether they would qualify.''
As developers and landowners await more guidance on opportunity zones, some mom-and-pop investors are starting to express an interest in them, too. Most don't realize that the investment must be made with profits that come from the sale of an asset, not with money that's just been sitting in a savings account or Individual Retirement Account.
"It's a common misunderstanding,'' Looney said.
Contact Susan Taylor Martin at [email protected] or (727) 893-8642. Follow @susanskate.