BY RYAN MUMMERT
In 2017, the Federal Tax Cuts and Jobs Act created a tax incentive intended to spur long-term investment in low-income urban and rural communities across the country that were coined “opportunity zones.” By investing in an area deemed to be an opportunity zone, an investor can effectively defer and potentially reduce tax liability from unrealized capital gains.
Why do we care? Guam is essentially one big opportunity zone.The currently delineated Guam Opportunity Zones (as illustrated by the Opportunity Zone Database at opportunitydb.com/tools/map) include Yona, Piti, Umatac, Merizo, Mangilao, Barrigada, and parts of Dededo and Yigo. More significantly, however, the Guam opportunity zones include prime stretches of Tamuning, Marine Drive, all of Tumon and the NCS area.
Although there are 8,000-plus other locations in the United States that have been deemed opportunity zones, Guam has its selling points. Namely the pending population surge from the military build-up, a steadily increasing tourist market and the current socio-politico-economic climate that sees Guam’s strategic position in the region continue to grow in importance. Guam real estate values have steadily surged since 2006 and Guam’s real estate cap rates of between 6% to 8% are still relatively attractive regionally, where cap rates tend to range from 0% to 3% in other areas nearby (Japan, Taiwan, Australia). Moreover, even at our current levels, the price points for entry into the Guam real estate market are still comparatively low.
Under the opportunity zone program, an investor could take a $100,000 capital gain (from the sale of property, businesses, stock, etc.) and invest it in an opportunity zones venture in Guam. The tax liability of the $100,000 capital gain would normally be 20% of the gain ($20,000), payable April of the tax year the gain was realized, but now that the gain has been re-invested in the Guam opportunity zone, the investor defers any tax payments until they sell their Guam opportunity zones investment or until December 2026, whichever is sooner. The amount of tax liability is reduced by 15% for an opportunity zones investment held for at least seven years and 10% for an investment held for at least five years.
In our example, let’s say that the investor holds the investment for 10 years and then sells the investment, which has now significantly appreciated, to $400,000, resulting in a $300,000 capital gain. Because the investment was held in the opportunity zones for the 10-year period, the $300,000 gain is tax free. The 10-year holding period required to avoid capital gains on the opportunity zones investment aligns nicely with the projected conclusion of the military build-up, allowing potential investors a tax-free parachute out of the market — in theory anyway.
Eligible investments into an opportunity zone can be in the form of a business that dedicates at least 50% of all company hours worked to the opportunity zones business; pays 50% or more of company dollars earned on services performed by the opportunity zones business; both the management/operational staff and tangible real property of the business in the opportunity zones must be necessary to generate 50% of the company’s gross income; and/or a real estate investment that is located in an opportunity zone and is improved significantly — which has been defined has doubling the adjusted cost basis of the newly acquired property within 30 months of acquisition.
What does that mean for Guam? It means a much-needed incentive to attract investment and development dollars that we should look to fully leverage. While the local discussion about opportunity zones appears to be centered around real estate, the wide swath of eligible areas in prime locations and the potential for opportunity zone businesses should have us all looking for opportunity wherever we find it. mbj
— Ryan Mummert is the general manager at Title Guaranty of Guam. He can be reached at [email protected]