Many investors are now wondering how to invest in Opportunity Zones themselves. In addition to considerable immediate and long-term tax advantages, Opportunity Zone investments offer wider access to tax incentives. Unlike tax credit programs of the past, Opportunity Zone investments come with significantly fewer restrictions, which opens up access to the new investment option.
Despite the benefits of Opportunity Zones, this newly created investment territory is unfamiliar to most investors. In this article, we explain the basics of the Opportunity Zones, their tax incentives, and outline ways to invest through an Opportunity Fund.
First, let’s look at what Opportunity Zones are and why they existed.
How do Opportunity Zones Work?
The Opportunity Zone program was created under the Investing in Opportunity Act, which was part of the larger Tax Cuts and Jobs Act of 2017. The act was designed to encourage private investment in economically distressed neighborhoods by offering investors. Accessing to new capital gains tax incentives in exchange for placing qualified investments in Opportunity Zone communities. Through a new investment vehicle called an Opportunity Fund.
Today, there are more than 8,700 Qualified Opportunity Zones in all 50 states in the US. The District of Columbia, and in five US possessions, which cover approximately 12% of all census tracts in the US. Current Opportunity Zones received their designation in 2018 will retain that designation for ten years.
How does the Opportunity Zone Program Differ from Tax Credit Programs?
Several tax credit programs intended to encourage investment in low-income areas existed before the creation of the Opportunity Zone program. Tax credit programs such as the New Markets Tax Credit Program and Low Income Housing Tax Credit Program. Generally rely more upon government agencies to function, and are more costly to administer. Tax credit programs are also subject to annual Congressional approval. Or tax credit allocation authority, which are limited in supply due to the nature of tax credit programs. Because the tax credit system limits the number of credits which can be issued each year. There’s an intrinsic limit on the number of investors who can participate. The total amount of dollars that can be invested into the development of a community under these programs.
Therefore, the availability of Opportunity Funds open for investment is not artificially limited. Instead, it’s limited only by the number of Opportunity Funds offered in the private market and by the investor requirement of each individual fund.
What Tax Incentives do Opportunity Zones Offer?
In exchange for investing in Qualified Opportunity Zones according to Opportunity Zone program regulations. Investors can access significant tax incentives exclusive to the Opportunity Zone program. To access these tax benefits, investors must invest in Opportunity Zones specifically through an Opportunity Fund.
When an appreciated asset is sold or otherwise divested, an investor realizes a capital gain, which is typically a taxable event. If an investor reinvests that realized capital gain into a Qualified Opportunity Fund, they can defer and reduce their tax liability on that gain. Additionally, they can also potentially realize all capital gains earned from their Opportunity Zone investment tax-free.
However, due to the fact that the Opportunity Zone program is intended to encourage positive growth within economically distressed communities. There are restrictions on the types of investments that an Opportunity Fund can hold.
Which Opportunity Zone Investments Qualify for an Opportunity Fund?
To qualify for tax incentives outlined above, Opportunity Zone investments must be made through a qualified Opportunity Fund. A qualified Opportunity Fund is a US partnership or corporation that intends to invest 90% or more of its holdings in “Qualified Opportunity Zone property.” Qualified Opportunity Zone property is limited to:
- Interests in a partnership that operates as a qualified business in a Qualified Opportunity Zone.
- Stock ownership of qualified businesses whose operations are based mostly or entirely within an Opportunity Zone.
- Property, such as real estate, located within an Opportunity Zone.
