Opportunity zones were created by the U.S. government in 2017 as part of the Tax Cuts and Jobs Act to encourage individuals and corporations to invest in low-income communities. Investors who choose to place their money into qualified opportunity funds can claim tax benefits, which means everybody wins. Read on to find out how opportunity zone investing works to see if it’s a good option.
How Do Opportunity Zones Work?
Opportunity zones provide an opportunity for long-term investment in low-income areas. Since the program was implemented, it has created jobs and offered an economic stimulus to undercapitalized areas through the encouragement of private investing. Currently, around 12% of US census tracts are considered opportunity zones.
What Are the Benefits of Opportunity Zone Investing?
The benefits of opportunity zone creation to local residents are obvious. It involves job creation, increased flow of capital to the area and, often, improved quality of life for locals. For investors, it involves taking advantage of one or more tax benefits, which include:
Capital gains tax deferral until 2026
Basis in step-up of deferred capital gains
Zero taxation of appreciation of capital gains
These tax benefits have already successfully incentivized investment in low-income areas. However, with the approaching opportunity zone deadline 2021 is the last year investors can take full advantage of the program since the money will need to be invested in the opportunity zone fund for a minimum of five years. In order to take full advantage of the capital gains tax deferral provision, investors should move their money into a qualified opportunity zone fund by December 31 of this year.
Why Are Opportunity Zone Funds Getting So Much Attention Now?
Savvy investors have been taking advantage of opportunity zone funds since their creation in 2017. With the program set to start wrapping up within the next few years, now is the time for last-minute adopters to jump on the bandwagon.
There’s also another factor that may make opportunity zone funds, and specifically, the reduction in capital gains taxation, look more appealing. Congress is currently considering raising the capital gains tax rates, especially for wealthy investors. While investing in opportunity zone funds won’t eliminate 100% of the tax burden from capital gains taxes, the basis step-up and the idea of paying no taxes on the appreciation of capital gains is making this strategy look more appealing every day.
How to Get Started
The first step to investing capital gains in an opportunity zone is to find a qualified opportunity fund. These funds are investment vehicles organized as partnerships or corporations for the explicit purpose of investing in one or more qualified opportunity zones. To qualify, a fund must hold at least 90% of all its assets in qualified property.
Technically, anyone can invest capital gains in an opportunity zone fund. However, most funds limit their offerings to accredited investors with at least $200,000 in annual income or a net worth of $1 million or more. Investment minimums vary, but most range from $25,000 to $100,000.
Don’t Waste Time
It can take anywhere from a few days to several weeks for investors to complete the accreditation verification process required to move their capital gains into qualified opportunity funds, so don’t delay. The deadline for taking maximum advantage of this program is coming up fast, and opportunity zone funds provide just as many benefits to investors as they do to local economies. It’s worth finding a qualified fund before time runs out.
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