Harlem’s Multi-Family Townhouses Are Opportunity Zone Hidden Gem

Posted May 6th, 2019

More than a year after the IRS introduced “Opportunity Zones” -- a chance to defer, reduce or even eliminate tax on capital gains by investing in under-developed and low-income neighborhoods -- many investors still haven’t taken advantage of this potentially massive tax break. As Barron’s reported, just 8% of institutional investors surveyed had pulled the trigger by the end of 2018, despite growing interest. This excludes smaller investors, but paints an accurate picture of activity so far.

Confusion has been largely to blame for the slow start, but we’re finally getting clarity on key details. Last week, the IRS released provisions that answered questions about whether or not real estate investors can refinance (they can), and whether businesses that focus on exports still qualify (they do).

More on the provisions below, but first, here’s a look at how Opportunity Zones work, and how you can make them work for you.

Opportunity Zones 101

Passed as part of the Tax Cuts and Jobs Act in 2017, Opportunity Zones let you defer taxes on capital gains by investing in one of 8,700 earmarked neighborhoods throughout the U.S. More than 300 OZs are in New York City’s five boroughs.

By investing in a qualified Opportunity Zone Fund, you can defer tax on capital gains for 5 years, at which point, you’ll only be taxed on 90% of those gains. Hold onto your asset for 7 years, and that 90% becomes 85%. After 10 years, you won’t be taxed at all on the appreciation. This is the golden advantage of Opportunity Zones, particularly when you invest in high-growth neighborhoods like Harlem.

Another factor that makes Harlem a hidden gem for Opportunity Zones is the variety of property and businesses that qualify, allowing even smaller, private investors to take advantage of OZs without an institutional fund. Multi-family townhouses promise the greatest returns with the least hassle for private investors.

Here’s what you need to get started:

  • A capital gain event. Before you can invest in an Opportunity Zone, you first need a capital gain, such as the sale of a stock, bond, business, or another property. Unlike a 1031 Exchange, which requires a “like-kind” property investment, Opportunity Zones allow you to invest any capital gain. You then have 180 days to invest in an Opportunity Zone Fund. You can deploy additional funds toward the investment, but you’ll only see the Opportunity Zone tax break on funds from capital gains.
  • A qualified Opportunity Zone Fund. Any investment you make must be from an IRS-approved fund. Notably, 90% of your capital gain must go into this fund. The good news is, anyone can start one. Click here to download the IRS form. Although you can’t invest solo, the rules are lenient about Partnerships. Even though you can’t invest in a property owned by a relative, for example, your fund can stay within the family.
  • A qualified property. Only money-making properties are eligible for OZ tax breaks; so personal residences are not allowed, but active rental properties are. New construction automatically qualifies within these guidelines, but if you buy an existing property, you must make renovations equal to your purchase price within 30 months. For example, if you buy a 3-family townhouse in Harlem for $2.5 million, you must invest another $2.5 million into renovations. A new provision also clarifies that all vacant properties immediately qualify.

Not sure if a property qualifies? Get in touch. I’m happy to look at it with you.

Where can I invest in New York?

New York has 300 OZs in the five boroughs. In Manhattan, these zones are primarily in fast-growing Harlem, with great potential for growth on both East and West sides.

Our Q1 2019 Townhouse Report showed a 14% year-over-year increase in the price per square foot in Harlem, while our 2018 end-of-year report showed a 15% increase in sales prices over the previous year.

Most multi-family townhouses on the market in Harlem are in approved Opportunity Zones with the potential to provide steady income and massive returns on a 10-year investment. Thanks to new provisions, we now know investors are allowed to lease and refinance their properties, making multi-family homes among the least risky OZ investments available. Read the full IRS FAQ here.

Featured Opportunity:

78 West 132nd Street - $2,599,000

Three-family brownstone near 125th commercial corridor.

Schedule a call with me here if you have any interest in obtaining a complimentary valuation for your home or buyer consultation.

Connect with me on Linkedin or Instagram for more information on the townhouse and multifamily market.


Authored by: Stanley Montfort


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