Opportunity Zone Program: Capital Gains Tax Deferral and 10% Discount Option Ending Soon.

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By Jeremy Feakins

Opportunity Zones offer some of the best investment opportunities for accredited investors in the U.S. If you are looking for substantial tax advantages while supporting America’s working families, take a look at investing in a Qualified Opportunity Zone (QOZ). By doing so, you can defer payment of your capital gains tax until 2026 and receive a 10% discount on the tax you owe. You will need to move quickly. These benefits will go away on December 31, 2021.

Need to know more about the Opportunity Zone Program? Check out these Opportunity Zone FAQ’s to determine if investing in one is right for you.

 What Is an Opportunity Zone?

Created by the Tax Cuts and Jobs Act of 2017, Opportunity Zones are an economic development tool that encourages people to invest in distressed areas in the U.S. They aim to stimulate economic growth and job creation in low-income communities and support America’s working families while offering tax benefits to investors.

To qualify as a QOZ, a locality must have been nominated for the destination by a state, the District of Columbia, or a U.S. territory. The Secretary of the U.S. Treasury then certified the nomination to the Internal Revenue Service (IRS). You can view a map of the current QOZs here.

How Do Opportunity Zones Work?

The program spurs economic development by giving investors tax incentives when they put new capital in businesses operating in QOZs. Accredited investors can get these tax benefits even if they don’t live, work or have an existing company in a QOZ.

You can invest in a Qualified Opportunity Fund (QOF) an investment vehicle created for QOZ properties. These funds can finance a broad range of projects, such as commercial and industrial real estate, housing, infrastructure and existing or start-up businesses.

QOFs must invest 90% of the capital raised from investors in physical assets (e.g., real estate or equipment) located in opportunity zones and/or ownership interests (e.g., stock) of businesses that operate at least partially in those areas. These can include subsidiaries of larger organizations based outside of the OZ.

What Are the Tax Benefits of Investing in Opportunity Zones?

QOZs offer three levels of tax benefits, which can lead to the permanent elimination of taxes. These opportunities are great for investors who wish to roll over capital gains:

  1. Investors can defer capital gains taxes from the initial sale of stocks, bonds, real estate or other capital assets, as long as they invest in a QOF within 180 days of the sale.
  2. Investors can hold the QOF for five years, or until 2026, to get a 10% exclusion of the deferred gain.
  3. Investors who hold the QOF for at least 10 years will not be liable for any federal tax on profits made from the investment. As such, the appreciation in the QOF investment is never taxed.

Who Can Benefit From Opportunity Zones?

Besides investors who reap the tax benefits of investing in QOZ, local communities in the Opportunity Zones can benefit from these investments. A study found that a QOZ program can increase employment by 3% to 4.5% in metropolitan areas, compared with eligible tracts that did not receive benefits.

Let’s take residential real estate development as an example. The Opportunity Zone program can address the rental housing shortage crisis by providing America’s working families with a viable housing solution, so they aren’t forced out of their communities due to rent hikes. More people can live close to where they work, which helps reduce transportation costs and environmental impacts.

Besides creating construction jobs, a housing development in QOZ also helps revitalize the area, brings in other businesses, and stimulates the local economy—creating a virtuous growth cycle.

Are Opportunity Zones a Sound Investment?

Due to the complex rules, it’s best to invest in professionally managed QOFs. The funds will select the investment types and structures with the best prospects for financial returns. The various requirements regulating the certification and maintenance of QOFs help ensure transparency of the process.

Just like any investment opportunity, there are risks involved in QOFs. You must do your due diligence and research a QOF as you would for other investment vehicles. Here’s what you should consider when you evaluate a QOF to ensure that it’s a safe investment:

  • Is the deal “shovel-ready”? For example, a real estate development should have zoning approvals to start the project. If not, you may have to wait years before seeing any gains.
  • Do the investment managers understand and have the ability to comply with the rules of operating a viable QOF?
  • Are the fund’s underlying investment and objectives sound, even without the tax benefits?
  • How long do you need to maintain your investment in the fund? Does it align with your time horizon?
  • Where’s the fund’s geographic focus, and what’s the growth potential of the area?
  • Does the fund have a profitable exit strategy?
  • What is the experience, expertise, and reputation?
  • Does the project incorporate other criteria that are important to you, such as sustainability?

QOF: Do Good While Doing Well

QOFs can provide safe and lucrative investment opportunities while offering many tax advantages. When you invest in a community-focused fund, such as a residential real estate project that also attracts business tenants, you can help America’s working families flourish in the face of today’s housing shortage crisis as well as creating business space for enterprises serving the community.

OZFund is a Lancaster, Pennsylvania-based Community Focused QOF that acquires and revitalizes below-market properties in the Opportunity Zones of Central Pennsylvania and the Mid-Atlantic region. The goal is to develop housing solutions that also help stimulate commercial activities

The OZFund anticipates that the properties they design, develop and rent to families will offer appreciation and cash flow potential. In addition, these investments could offer an increase in investor income. Contact the OZFund to learn more about investment opportunities in QOZs with high growth potential.