Why You Should Invest in an Opportunity Zone
The Tax Cuts and Jobs Act of 2017 contains a few salient features that are geared towards stimulating the American economy.
Aside from major revisions in the country’s tax regime, the new law also aims to resuscitate low-income neighborhoods through private investment.
This is the rationale behind the creation of Opportunity Zones which, under the new law, are considered tools for developing “distressed communities” and providing massive benefits for private investors. But how does this work exactly?
Opportunity zones are nominated by the state and certified by the US Treasury. Since the new law was passed, there have been designated opportunity zones across the United States and its territories offshore.
Along with opportunity zones, qualified opportunity funds or QOFs are also created to facilitate investments within the zones. QOFs function as partnerships or corporations that invest in eligible opportunity zone properties. But what are the benefits of coursing money into one of these in the first place?
Benefits in two ways
Opportunity zones reward investors who are able to revitalize distressed properties and transform entire communities for the better. The benefits come in the form of tax deferments. The Internal Revenue Service sums up this scheme:
“First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.”
In other words, the longer you hold on to an opportunity zone, the less tax you pay for any capital gains once you have decided on selling the property. Sure enough, this mechanism proves to be highly effective in terms of attracting private investors who could turn rundown neighborhoods into impressive suburban havens.
Why make the decision
Opportunity zones offer a wide range of benefits for commercial real estate investors. For one, you wouldn’t even need to live in the opportunity zone to avail of their tax deferments. All you need to do is invest in a recognized gained in a legit QOF and elect to defer the tax on that gain. Added to this is the fact that there are no credit caps to speak of as opportunity zone investments require no qualification criteria.
So, what does this mean for a lot of investors? It only means that investors are able to access instruments that will help them turn a profit for the long-term. For the residential real estate sector, this would mean home values will begin to pick up in many distressed places.
But the best benefit of all would go to the people in opportunity zones themselves as they see the entire community changed for the better.