Earn Money & Save taxes! Be an Investor in Opportunity Zones

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Benefits of Being an Opportunity Zone Investor

  1. Investors can defer their capital gains and thus not pay taxes on the gains until the year 2026.
  2. Reduce your taxes to up to 15% if you invest in a qualified opportunity fund for 7 years.
  3. If investments are untouched for over 10 years, the interest earned may be entirely tax-free. The rate of savings varies by the number of years the investments are held. [2]
  4. While earning money, you would also help in community building. With new investment in a low-income area, you would be giving a helping hand in the community by not only advancing infrastructure but also indirectly increasing employment.

See the following examples to understand how you can benefit more if you invest in an opportunity zone.

  1. “A man earns $1.5 million on investment and will need to pay $300k in taxes on this growth. If he pays taxes on capital gains, he will only be able to invest $1.2 million; however, if he immediately invests in an Opportunity Fund, he will be able to invest the entire $1.5 million. This gives the investor even more money to work with, which does two things: first, ensures that the investor is compounding his returns on a larger sum; and second, it further stimulates the economy with an additional $300,000.” [3]
  2. “Say an investor sells the stock today for a $1 million gain and puts it in a qualified opportunity fund. She would have nothing due now, but in 2026, she would have to pay taxes on 85% of the original $1 million. Then, if she sells the fund interest in 2028 for, say, $10 million, she would pay no taxes on the $9 million gain.”[4]

Now that we have your attention, we are sure that it must be a load off your chest regarding paying taxes! 

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So what are Opportunity Zones?

“The program, created in the 2017 tax bill, seeks to funnel capital gains on the sale of assets into long-term investments in low-income neighborhoods by conferring a sizable tax benefit on investments in those areas, with the goal of boosting economic development and creating jobs. Under the program, investors can pour any capital gain into a Qualified Opportunity fund, either self-certifying their own funds to the IRS or joining one offered by an investment manager.” [6]

Let’s face it! We may be all business-savvy professionals, ensuring that we meticulously calculate when to buy and sell shares and at the right time and price. For what? To get some extra money. Or earn a great deal while selling real estate property. Now that’s some cold hard cash right there!

Comes the time for filing taxes and you find that a large sum of that hard-earned money goes in paying capital gains taxes! Well, that’s a demotivator right there!

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So, if you invest in Opportunity Zones, you can defer as well as save up on taxes!

Opportunity Zones are areas where an investor can get tax benefits if they invest in them. These zones are classified under the Tax Cuts and Jobs Act of 2017. This is because larger cities in the USA are becoming even larger while growth in some areas is at a standstill. This initiative by the government is to stimulate the economy and provide a window of possibility to citizens who have a low income as well as lesser opportunities.

How many Opportunity Zones are there in the USA?

There are more than 8,764 zones in the 50 states, and five U.S. possessions, including American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the Virgin Islands.[8]

So, how does it work?

Either you are an Opportunity Zone Fund Investor or would like to have an Opportunity Zone Fund. Both need certain requirements.

How to be an Eligible Opportunity Zone Fund Investor

  1. First and foremost, you need to put your investment in an Opportunity Zone Fund, which is a qualified partnership or corporation that invests in the Opportunity Zone for you.
  2. You need to have eligible capital gains in order to invest. “It could be from the sale of stocks or bonds, the sale of a property, or the sale of an interest in a partnership.”[9]
  3. Long-term and short-term gains can be invested in an Opportunity Zone Fund.
  4. Within 180 days of a capital gain, an investor has to invest that money into the qualified opportunity fund.
  5. The investor must make the election on deferring the gain in the tax returns as per the financial year in which the capital gains tax occurred as well as the investment in the Opportunity Fund. The investor is solely responsible for ensuring eligibility and qualification in each investor’s individual circumstance.
  6. Only the investors with qualifying capital gains are eligible for the Opportunity Fund tax benefit.[10] 

How to be an Eligible Opportunity Zone Fund

  1. A qualified Opportunity Zone Fund is an investment vehicle. It can be a corporation or a partnership and its purpose to be formed is to invest in qualified opportunity zone property.
  2. At least 90% of the fund’s assets must be invested in qualified opportunity zone property.
  3. The capital gains that is invested in the Opportunity Zone Fund must constitute equity and NOT debt.
  4. Properties in which the Opportunity Fund invests must be improved within 30 months or have their original use commence with the Opportunity Fund in the opportunity zone. 
  5. The aim of investing in the opportunity zone property is to improve it or engage in its development.

Caution!!

  1. Investments must be made within 180 days of the sale that resulted in capital gains, so investors need to take care not to let this deadline pass. After the window of 180 days has passed, an opportunity fund can no longer prevent investors from hefty taxes.
  2. Effectively ALL of the use of the property has to be within the zone during the holding period. And business in a qualified zone has to derive at least 50% of its gross income from active business in a qualified opportunity zone. 
  3. And the investment cannot be in a “sin business,” like a country club or golf course, liquor store, massage parlor, racetrack, or any gambling venue. Nor can it be a facility that furthers the use of hot tubs or tanning.[11]

Who Should Invest in an Opportunity Zone Fund?

Investors with large capital gains who do not need the money immediately would benefit from investing in an Opportunity Fund more often than not. 

Some Opportunity Funds to Consider:

  1. Fundrise – focuses on real estate. The company invests in “major US cities with long-term growth potential” to help investors make the best use of their capital gains. It also uses an approach to investing that is low-cost.
  2. Caliber’s – utilizes diversified portfolios to help clients reinvest their capital gains. They also illustrate the opportunity zones on their website so that investors can better understand where their funds go geographically.
  3. Cresset Capital – has recently partnered with a real estate investment firm to provide Opportunity Funds across all the United States. The investment options include real estate, development, re-development, and private company investments. [12]

These are the benefits, rules, cautions, and opportunity funds that you need to know to better understand how to invest in Opportunity Funds. Please share your thoughts in the comments section and stay tuned to Alumni Insider for more insightful blogs like this. 

References:

  1. Featured Image – Courtesy of Tim Peacock.
  2. Should I Invest in an Opportunity Zone Fund?
  3. Should I Invest in an Opportunity Zone Fund?
  4. Why “Qualified Opportunity Zones” May Be the Best Hot Thing in Investing
  5. Image – Pixabay
  6. Opportunity Zone Rules Just Got Clearer, Giving Investors a Green Light
  7. Image – Pexels
  8. Opportunity Zones
  9. Urban Catalyst
  10. Urban Catalyst
  11. Why “Qualified Opportunity Zones” May Be the Best Hot Thing in Investing
  12. Should I Invest in an Opportunity Zone Fund?
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2 Comments

  1. So let me come straight to you.
    Firstly I loved the pictures an I decided to read It and
    thirdly I have bookmarked your blog

    your regular reader.

    Pranjal

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