People who want to invest money to make a profit and also help the development of economically distressed areas can do both. There are tax incentives for investors who choose to invest in economically distressed areas or the Federal Opportunity Zones Program. This program helps investors reduce or defer capital gains taxes.
Invest In Opportunity Zones
Investing in qualified opportunity zone funds is a way to help disadvantaged people and save money on taxes at the same time. When investing in opportunity zone programs, the investor can defer capital gains taxes and invest the funds to increase their profit and financial gains. A ten-year investment timeline can look like this.
Year 1, 2021: The investment of capital gains from earlier investment is made to a Qualified Opportunity Fund and taxes begin to be deferred.
Year 5, 2026: The tax basis increases for 10% of invested capital gains, this reduces tax liability assuming the investment was before December 31, 2021.
Year 6, 2027: The investor pays taxes on the original gain less the 10% reduction.
Year10+, 2031: Don’t pay any federal capital gains taxes nor recapture amount on the depreciation for the Qualified Opportunity Fund once sold.
If this is hard to understand, don’t worry, as your investment counselor will explain the whole investment program to you.
Who Does Your Investment Help?
Opportunity zones are distressed areas in the United States or low-income areas that will benefit from outside investment to spur economic growth and create new jobs. There are thousands of these areas throughout the 50 states that need help to improve the lives of their residents.
First, a community makes the effort to qualify as an opportunity zone. Then, they wait for their states to nominate them for this designation. The U.S. Department of the Treasury certifies that nomination.
To qualify for this designation a community must have a minimum poverty rate of at least 20%. The median family income in the community must be less than or equal to 80% of the median family income for their state for the census or tracts that are non-urban. Or tracts of the census that are in metropolitan areas must have a median family income of 80% or less of the statewide median family income level for urban areas in their state.
Investors must find a qualified Opportunity Fund to invest in. The Opportunity Fund can then invest in both real estate and in businesses located in the Opportunity Zones. The real estate must be newly constructed or substantially rehabilitated. The Opportunity Fund has to invest more money into improving the newly purchased property than they spent purchasing it. The business being invested in must do at least 50% of their business in the community.
So the Opportunity Fund Investment helps the people living in the neighborhood with job opportunities and improved lifestyles. It helps people move up to homeownership and the middle class.
Environmentally friendly housing is achieved during home rehabilitation projects. The long-term energy use is reduced by adding insulation, tankless hot water heaters, and other energy-saving improvements.
Explore Different Opportunity Zone Investment Opportunities
These investment funds don’t all provide the same benefits or results, so it is important for a potential investor to do a little investigation into different programs to pick the one they feel most comfortable with. There are strict rules that Opportunity Funds must follow. There are strict timelines they must follow.