Company Background
Leveraging over 10 years of investment expertise in the U.S. real estate industry, a real estate investment company’s (the Company) portfolio ranges from single-family housing across the Midwest to commercial, hospitality and mixed-use properties all over the Southeast. The Company had capitalized on their property’s depreciation and sold an asset to generate multimillion-dollar section 1231 gains.
Following the sale, the Company was interested in reinvesting in U.S. real estate, while taking advantage of any strategic tax benefits that coincided with a desired new investment. The Company scouted a hotel located in an opportunity zone (OZ) and was excited to explore the feasibility of the investment.
With multitudes of investments spanning various asset classes, it is imperative to your bottom line that you are allocating funds strategically and aren’t leaving money on the table. With over 75 years of tax consulting and compliance services, Cherry Bekaert’s Opportunity Zone Team can step in and advise on these investment funds and tax credits and incentives.
Structuring an Opportunity Zone Project
After conducting preliminary meetings and work sessions to brainstorm possible solutions, Cherry Bekaert suggested structuring the purchase and operations of the hotel so that it would create a Qualified Opportunity Zone Fund (QOF) and a Qualified Opportunity Zone Business (QOZB). In doing so, this purchase would provide for deferment of tax on the realized gains, saving the Company money up-front.
OZ projects are required to meet “substantial improvements” tests, among other standards. The business model of this hotel brand, like its average nightly rates, would not sufficiently support the capital investment and renovations required to meet the test. With this in mind, Cherry Bekaert created brother-sister entities: one to own the real estate property and a QOZB to operate the hotel. The QOZB utilizes a long- term management agreement and lease with the property so that the QOZB provides all furniture, fixtures, linens and staffing needs.
Realizing Tax Benefits
By implementing an OZ and leveraging OZ program requirements for this hotel investment, Cherry Bekaert allowed the Company to:
- Defer tax on $2.2M under 2026
- Save $55k on taxes with a 10% step up in tax basis
- Generate current tax deductions via accelerated depreciation
- Achieve tax-exempt growth after a 10-year holding period
Cherry Bekaert provided a valuable cost segregation analysis of the investment to measure and conceptualize the amount of deferred tax payments. Additionally, the team allowed the Company to capitalize on Employee Retention Credit (ERC) benefits because of the nature of the investment and industry.
Finally, upon selling the hotel investment, there will be no federal or state tax on the investor’s proceeds. The tax exemption extends to deprecation and tax credit recapture, which adds to the total internal rate of return on the investment.
Let Us Guide You Forward
Cherry Bekaert can help your company grow and excel, regardless of the economic climate. Our Real Estate & Construction Industry professionals can customize a strategic plan tailored to your business goals, covering objectives such as effective tax strategies, structuring developments and profitability analyses. For more information on how our Opportunity Zone Tax Services Team can assist and advise on the next steps in your OZ project, please contact us today.
Related Insights
- Article – The Evolving Opportunity Zone Fund: Where Are We Now?
- Article – IRS Letters to Qualified Opportunity Zone Funds and Investors Regarding Forms 8996 and 8997
