In 2017 a tax overhaul bill was passed and there was much talk about the changes to the tax treatment of real estate. However, there hasn’t been much conversation around the bill’s Investment in Opportunity Act and the possibilities it holds for both investors and American communities.
While Opportunity Zones are becoming more recognized, there are still questions and concerns which could use some clarification. Here are a few “need to knows” about opportunity zones, what they are, how they are used and why you should invest in them.
What are Opportunity Zones?
According to the IRS, “An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” In order to be considered an Opportunity Zone, the area must also align with the criteria of the 2017’s Tax Cuts and Jobs Act. Over 8,700 Opportunity Zones are already eligible within the United States and its territories.
The Opportunity Zone Program and Its Potential
Many American communities have been left behind when it comes to economic growth. The Opportunity Zone Program is a less restrictive and less costly program designed to encourage more private investments (an estimated $6.1 trillion in unrealized capital gains) in these communities. Other programs, like the New Markets Tax Credit (NMTC) program or the Low Income Housing Tax Credit (LIHTC) program, can be limited in supply and face annual congressional approvals and tax credit allocations. Essentially, the tax credit system restricts the number of yearly tax credits and therefore limits the number of investors who are eligible to participate. The Opportunity Zone Program can ultimately help in planting the seeds of prosperity for our fellow Americans by stimulating the development of businesses and jobs that are critical to energizing economic growth and well-being of the area and its residents.
Opportunity Zones Favorable for Economic Growth
While it is true that the United States is experiencing a positive change in the economy, this growth has not touched every community. These areas untouched by growth and economic prosperity are low-income communities and are likely to be considered an Opportunity Zone.
Opportunity Zones in the United States and its surrounding territories may have a high need but these areas have proven potential for growth. This is where investors come in. Investing in Opportunity Zones can be a win-win for both investors and communities. Opportunity Zones receive economic advancement, and investors benefit from tax incentives.
How do you Invest in Opportunity Zones?
In order to invest in Opportunity Zones and receive benefits, one must do so through Opportunity Funds. Opportunity Funds are directed by IRC section 1400Z-2 and can self-certify to the IRS.
When it comes to receiving tax incentives, each Opportunity Fund must be responsible for making sure it follows Opportunity Program guidelines. An acceptable Opportunity Fund must be a partnership or corporation who plans on investing 90% of holdings in one or more certified Opportunity Zones. You can find more on restrictions and guidelines here.
Overall, the Opportunity Zones program could be the catalyst which sparks growth and prosperity in our underserved communities. While investors can experience a variety of capital gains tax incentives through the program, they also have the power to create a bright future for these communities and the individuals who reside in them.