Opportunity Zones

What Are Opportunity Zones and What Benefits Do They Offer?

Efforts are continually being made to improve distressed communities.

Opportunity zones are economically distressed communities where certain new investments may be eligible for preferential tax treatments.

The areas have been nominated by the state and they have been certified as Opportunity Zones by the Secretary of U.S. Treasury via the Internal Revenue Service.

The zones were added to the IRS tax code by the 2017 Tax Cuts and Job Acts were created to spur economic development and job creation in the area.

Read on to find out more about opportunity zones and how they can benefit investors and the community.

What Tax Incentives Are Available Through Opportunity Zone Investments?

There are three tax incentives available to those investing in low income communities through a qualified Opportunity Fund. These include the following.

·        Temporary Deferral of Taxes: Investors can place existing assets with accumulated capital gains into Opportunity Funds. Money placed in these funds can not be taxed until the end of 2026 or when the asset is disposed of.

·        Basis Step Up: Capital gains that are placed in Opportunity Funds for at least five years will increase by 10%. After 7 years, the profit margins increase by 15%.

·        Permanent Exclusion of Taxable Income on New Gains: Investors will not have to pay taxes on any capital gains produced through investments in Opportunity Funds that are held for at least 10 years.

Opportunity Funds can be used to finance a variety of projects including commercial and industrial real estate, infrastructure, and businesses. For real estate projects to qualify, the investment must result in the properties being substantially improved.

What Qualifies a Community as an Opportunity Zone?

Areas that are designated as Opportunity Zones have been nominated by the governors of the 50 United States and 4 territories as well as the mayor of Washington. They account for 12% of US census tracts. These zones were chosen based on their income, poverty rates and unemployment rates.

Socioeconomic factors also come into play. Home values, rents and home ownership rents are lower in Opportunity Zones. There are also more minorities and lower education levels.

Are Opportunity Zones Effective?

Opportunity zones are great for investors who can benefits from the tax incentives. However, there is a concern that it raises prices for those living in the area, essentially pricing them out. It is hopeful that the jobs created will eventually make up for this loss bringing income levels higher so that properties are more affordable.

So what do you think? Is an Opportunity Zone investment right for you?