Education

What Are Opportunity Zones and How Can They Benefit You?

By Matt Picheny

Let’s face it, no one enjoys paying taxes but it is part of our civic duty. Paying taxes helps the government provide much-needed infrastructure and services for the country. I think just about everyone would agree that roads, schools, and fire departments are positive things for your community.

But the government recognizes there are other important things that are good for the country and are much larger and just too cumbersome for them to take care of on their own. These are things such as providing jobs and housing. In order to induce investments in projects that help the country, the government creates incentives in the tax code to make them more profitable for investors.

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Opportunity Zones 101

Created by the Tax Cuts and Jobs Act of 2017, Opportunity Zones are designed to encourage long-term investment in low-income communities by offering tax incentives to investors.

The Department of the Treasury has designated more than 8,700 census tracts as Qualified Opportunity Zones. These areas were nominated by the Governors of each State, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, Guam, and the Northern Mariana Islands, and were designated by the Secretary of the Treasury based on criteria established in the Tax Cuts and Jobs Act.

To take advantage of the program, one must invest in a qualifying Opportunity Zone fund. This is a special-purpose vehicle created for the purpose of investing in Opportunity Zones. The fund must be certified by the Treasury Department and can be set up as a corporation or partnership.

A Qualified Opportunity Fund must hold at least 90% of its assets in Qualified Opportunity Zone property.

The fund can’t just acquire an existing property within the Opportunity Zone, it must also make substantial improvements to the property over a 30-month period. For example, if a property is purchased for $1 Million, the fund has 30 months to make improvements on the property that are greater than $1 Million.

Attractive Tax Incentives

The federal tax incentives are designed to attract private capital investment to communities that may have been overlooked in the past. The idea behind it is that by offering these tax breaks, investors will be more likely to invest money in these areas, which will create jobs and help to revitalize these communities.

The Incentives are three-fold:

  1. Initial Gain Deferral: A deferral of capital gains tax on any sale of an asset (e.g. stocks, real estate) if the proceeds are reinvested in an Opportunity Zone within 180 days.
  2. Forgiveness of a portion of the Initial Gain Deferral: A reduction of capital gains tax of 10% on investments held for at least 5 years or 15% for investments held for 7 years.
  3. Fund Gain Exclusion: A permanent exclusion from taxable income of capital gains from the sale of an investment in an Opportunity Zone, if the investment is held for at least 10 years.

Program Deadlines

The deadline to invest in a Qualified Opportunity Zone is December 31, 2039. So long as you have invested by that deadline, you would qualify for the Fund Gain Exclusion, which is by far the strongest tax incentive in the program.

The Initial Gain Deferral period lasts until December 31, 2026. At that time the taxes you initially deferred would be due, but you would be able to apply any of the Forgiveness of Initial Gain Deferral that might apply. In order to take advantage of this Forgiveness you would need to have invested in an Opportunity Zone by December 31, 2021.

There is legislation entitled “Opportunity Zones Transparency, Extension, and Improvement Act” pending in both the U.S. Senate and U.S. House. There is no guarantee that the Act will be enacted, or if enacted, that it will be signed into law by the President. The Act, as currently drafted, would change the Initial Gain Deferral period to December 31, 2028, and the Initial Gain Forgiveness for 2022-eligible investments would be entitled to the 15% reduction.

Important Considerations

If these tax incentives pique your interest — and they are designed to do just that — then you might be thinking about investing in an Opportunity Zone. There are a few things you should keep in mind.

First, it’s important to consult with a tax advisor to see if you qualify for the tax benefits and understand the rules and regulations.

Second, you should have a clear investment strategy and plan.

Third, do your due diligence, as you would with any other type of investment. Remember, the primary purpose of investing in an Opportunity Zone is to generate attractive risk-adjusted returns, not to save on taxes. Don’t let the tax incentives blind you to the investment risks.

Investment Philosophy

As you may know, I’m very interested in leaving the world a little better than I found it through win-win investments. I’ve found that Opportunity Zones really fit my investment philosophy. They can be great projects that revitalize and enhance communities while also being lucrative, tax-advantaged investments.

In an effort to be fully transparent, you should know that the program has received some criticism. As you can see in this New York Times article, some people have found loopholes where a portion of Opportunity Zones can be located in, or near, more affluent areas. However, overall the program does benefit communities that can be transformed through economic development.

The Opportunity Zones program is administered by the U.S. Department of the Treasury’s Community Development Financial Institutions (CDFI) Fund. The CDFI Fund designates Qualified Opportunity Zones in economically-distressed communities nationwide based on poverty rates and median family incomes.

The communities designated as Qualified Opportunity Zones represent a broad cross-section of the U.S. economy. More than 70% of the U.S. population lives within 10 miles of a Qualified Opportunity Zone.

The zones cover more than 35 million people, or about 11% of the U.S. population, and are home to more than 9 million small businesses. The average poverty rate of a designated Qualified Opportunity Zone tract is 32%, and the average unemployment rate is 12%.

For more about Opportunity Zones, get the full details from the IRS by visiting: https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

Don’t forget to join the Picheny Investors Club where I share information about tax-advantaged win-win investment opportunities.


The information provided on this website is not advice and does not purport to be a substitute for professional adviceYou should seek out the services of professionals who are experts in the fields of investment, legal, and accounting concerning your specific situation. The author disclaims any responsibility or any liability, loss, or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any contents of this website.