Why You Should Consider Investing in an Opportunity Zone‍

Investors who have the capital to invest and a desire to make a positive impact with their capital can look for zones where the growth potential is limited by a lack of access to capital or risk capital, a shortage of trained workers, or other challenges related to amenities, capacity, and connectivity.

Opportunity Zones were created as a way to help under-resourced communities to thrive. These zones are areas where the growth potential is limited. The federal government created this designation as part of the Tax Cuts and Jobs Act of 2017.

Investors can put capital into various assets in these zones, including equity, mezzanine debt, and certain real estate property types. Below is an overview that will help you understand the fundamentals of these new investing incentives.

Tax Benefits of Investing in an Opportunity Zone

Opportunity Zones are designed to encourage investors to invest long-term in places where economic development has lagged. Because these investments are expected to produce neither short-term nor immediate profits, capital gains taxes on the gains from these transactions are deferred.

In other words, the taxes are put off until the end of the investment period or the end of the 10-year holding period for real estate investments. Suppose the investor holds the asset for ten years; they can defer capital gains taxes on the appreciation of the investment or pay taxes on the gains upfront at the current, lower rates. However lucrative it is, the investment demands patience to maximize the savings.

Reduction of the Deferred Gains

If an investor holds the asset for less than ten years, the capital gains taxes on the gains are reduced. Investors should consult with their tax advisor to determine whether they should take the gains upfront or wait until the end of the 10-year tenure. Some investors might consider investing in a fund that holds multiple investments in Opportunity Zones. This strategy might give them additional flexibility in deciding whether to defer or take the gains immediately.

Permanent Gain Exclusion on the Appreciation of the Investment

Capital gains taxes on the appreciation of investments made in Opportunity Zones are eliminated if the investor holds the asset for ten years. This significant benefit could help investors increase their after-tax discounted cash flow. This asset needs to be held in a fund that invests in Opportunity Zones.

It's also important to note that while Opportunity Zones are permanent, they are also place-based. Suppose the community that the investor invested in improves. In that case, the fund manager might be able to reinvest in the same Opportunity Zone.

Final Words: Should You Invest in an Opportunity Zone?

Investing in an Opportunity Zone benefits you as an investor and the communities affected. There will be a significant decrease in poverty due to the well-paying jobs created during the set-up.

Known to be 'Revolving Fund' zones, the opportunity zones give you, as an investor, the ability to get your money back after making investments in these regions. So, if you are looking for a long-term way to invest your money, opportunity zones are the places to take your money.