Are Opportunity Zones the Right Investment for Me?

When considering investment in real estate, having a firm understanding of Opportunity Zones is very important. Since they are still a relatively new concept, there can be quite a bit of confusion as to what, exactly, they are and how they can impact the investing process. Rather than scouring the internet to broaden your understanding, we’ve got everything right here to answer your basic questions and help you make informed decisions as to whether investing in Opportunity Zones is right for you.

What is an Opportunity Zone?

The idea of Opportunity Zones was first introduced when it was added to the Tax Cuts & Jobs Act on December 22, 2017. An Opportunity Zone is an area of economic distress that meets the criteria outlined in the Tax Cuts & Jobs Act. The purpose behind them was to spur economic development and job creation, and consequently help progress communities that were experiencing financial hardship by offering incentives to investors who were willing to fund the process of rebuilding these areas. These incentives come in the form of tax benefits. Initially, in April of 2018, only certain parts of 18 states were implementing new Opportunity Zones, but that number has increased greatly. Now, Opportunity Zones have been implemented throughout parts of all 50 states, the District of Columbia and in five of the sixteen U.S. territories (Guam, American Samoa, the Virgin Islands, Northern Mariana Islands and all of Puerto Rico). The government allows up to ¼ of all low-income areas within a state, district or territory that meet the criteria put forth by the program to become designated Opportunity Zones. So, what are those qualifications?

How Are Opportunity Zones Determined?

Initially, Opportunity Zones are nominated by the state, territory or district in which they exist. These nominations are then reviewed and ultimately designated when they are certified by the U.S. Secretary of Treasury. In order to qualify for nomination, an area must meet the following qualifications:

  • Must have a minimum poverty rate of 20% OR
  • A median family income of either below 80% of the median family income statewide for census tracts within non-metro areas OR below 80% of the greater statewide median family income or the metro median family income for census tracts within metro areas.

Of the areas that qualify under these terms, only 25% can be nominated. An extra 5% in each area could potentially qualify by meeting a different set of geographic and income conditions.

  • A census tract that neighbors an Opportunity Zone AND
  • A median family income less than 125% of that of the neighboring Opportunity Zone.

Under these criteria, 57% of all American neighborhoods were initially nominated as part of this program.

How Does Investing In Opportunity Zones Work?

Investors are drawn to Opportunity Zones because of the immense tax incentives offered to them. In order to gain access to these benefits, investors must invest through Opportunity Funds. In order to qualify as an Opportunity Fund, there must be a US partnership or collaboration with the intention to invest no less than 90% of its holdings into one or multiple Opportunity Zones. Opportunity Funds are self-certified and are, therefore, responsible for ensuring that they abide by the rules and regulations put forth by the government in order to be able to offer tax incentives to investors. Opportunity Funds may only invest in Qualified Opportunity Zone property, which must meet the following criteria:

  • Partnering with businesses operating within the boundaries of an existing Opportunity Zone.
  • Buying stock in businesses that handle the majority of their business within a qualified Opportunity Zone.
  • Purchasing real estate or land within a designated Opportunity Zone.

Each of these options comes with its own set of rules and regulations.

What Are the Tax Advantages of Investing in a Opportunity Zone?

Capital gain tax incentives offered to Opportunity Zone investors are substantial. By re-investing a qualifying capital gain into an Opportunity Fund, an investor may both reduce and defer the tax liability owed on that gain. They may also be eligible to take advantage of tax-free treatment for any future appreciation the fund may earn. There is a specific timetable that determines the magnitude of the benefit the investor could potentially gain.

Do I Need to Live in an Opportunity Zone to Take Advantage of the Benefits?

Absolutely not! There is no requirement stating you must live or work within the boundaries of a qualified Opportunity Zone in order to take advantage of the investment benefits offered. You must simply invest a qualified gain into a Qualified Opportunity Fund and choose to defer your tax on the gain.

As you may realize, there are many benefits to investing in Opportunity Zones. Beyond just helping the investor, choosing this route allows you to contribute to the rebuilding process within an impoverished area. It’s a win-win all around.

Matt Slezak | Associate Broker
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