Most investors have heard of Opportunity Zones, regions designated under a federal program to help stimulate local growth. These are known as QOZs (Qualified Opportunity Zones).
But did you know Pennsylvania has its own state-level opportunity zone program with state tax benefits as well?
Pennsylvania’s Keystone Opportunity Zones (KOZs) offer a compelling incentive for real estate investors aiming to develop or redevelop properties in underutilized areas. By providing significant tax abatements, KOZs are designed to stimulate economic growth and community revitalization.
Understanding KOZs
Established in 1998, KOZs are specific geographic areas designated by local communities and approved by the state. These zones aim to attract investment by offering tax exemptions on various state and local taxes, including:
- Corporate net income tax
- Personal income tax
- Sales and use tax
- Property tax
- Business gross receipts tax
The duration of these tax benefits typically spans 10 years, providing a substantial window for developers.
Business-level tax benefits can help real estate investors by giving them an incentive to offer to commercial tenants, helping attract and retain great tenants. The abatement of income and property taxes can also benefit the real estate investor who holds the property over the long term.
QOZ vs. KOZ: State vs. Federal Programs
The Qualified Opportunity Zone (QOZ) program is a federal capital gains tax incentive offered to taxpayers in exchange for deferring and investing capital gains into designated, distressed census tracts.
The Keystone Opportunity Zone (KOZ) program is a Pennsylvania tax abatement incentive designed to revive economically distressed properties in communities across the commonwealth. It provides state and local tax abatements to businesses and residents locating in a geographically designated zone.
Note that in some cases, a location may be both a QOZ and a KOZ.
Benefits for Real Estate Investors
- Cost reduction: tax abatements lower the overall cost of development, making projects in KOZs more financially attractive.
- Increased ROI: with reduced tax liabilities, developers can achieve higher returns on investment, enhancing the appeal to financiers and stakeholders.
- Market expansion: KOZs often encompass areas with untapped potential, allowing developers to enter emerging markets with less competition.
- Community impact: developing housing in KOZs contributes to community revitalization, addressing housing shortages and stimulating local economies.
Eligibility and Compliance
To qualify for KOZ benefits, developers must:
- Ensure the project is within a designated KOZ.
- Submit an annual application to the Pennsylvania Department of Community and Economic Development (DCED).
- Meet specific investment or employment criteria, such as increasing full-time employment by 20% within the first year or making a 10% capital investment based on the prior year’s gross revenues.
Compliance with these requirements is essential to maintain eligibility for tax benefits throughout the KOZ designation period.
Strategic Considerations
Site selection: use the KOZ interactive map provided by the DCED to identify eligible parcels that align with your development goals.
Community engagement: collaborate with local authorities and community organizations to ensure the project meets local needs and garners support.
Long-term planning: factor the expiration of KOZ benefits into your financial models to ensure the project’s sustainability beyond the tax abatement period.
Conclusion
Keystone Opportunity Zones present a unique opportunity for real estate investors to develop housing projects with significant tax advantages. By strategically selecting sites and adhering to program requirements, developers can contribute to Pennsylvania’s economic revitalization while achieving their investment objectives.
If LERTA and KOZ incentives sound like they could fit your next project, contact us to discuss how to layer these programs into your investment strategy.
