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How Investors Can Do Good While Doing Well Through Opportunity Zones

How Investors Can Do Good While Doing Well Through Opportunity Zones

The Tax Cuts and Jobs Act of 2017 that Congress passed was the most significant federal tax reform law since 1986. The extent of its benefits and who it helps most may be subject to debate. The law’s proponents say it promotes economic growth. For investors, one of the law’s clearest benefits is found in just six of the more than one thousand pages this statute contains. That benefit is known as the Opportunity Zones (OZ).

OZ present investors with a great opportunity for capital gains tax relief so they may keep more money. Remember, the important thing is not how much you make, but how much you keep. This article provides a basic overview of OZ and why investors should explore putting their money into qualifying investments. Before rushing-in to invest in OZ, however, it’s important to remember that the investment itself should be a sound one, with strong fundamentals, not simply because it’s in an OZ. If you can find both, all the better.

What Are Opportunity Zones?

They are low-income census tracts nominated by the states’ governors and certified by the U.S. Treasury. Nationally, there are 8,762 OZ in all fifty states, Puerto Rico and the Virgin Islands. With most of Puerto Rico qualifying. The OZ are created to give investors incentive to deploy capital gains into low-income areas, generate economic activity, and create jobs. The ROI comes in the form of capital gains tax advantages. This initiative is a rare bipartisan achievement. Bills to create OZ were sponsored by members of both parties in the House and Senate.

How Do Opportunity Zones Work?

Investors can defer taxes paid on prior gains if they are invested into OZ. The tax deferral lasts until the earlier of when the investment is sold (or exchanged) or December 31, 2026. If the OZ investment is held for over five years. There is a 10% exclusion of that deferred gain. If held for over seven years, the exclusion is 15%. If the investor holds for over ten years, they receive the additional benefit of a stepped-up basis of the OZ investment equal to the fair market value on the date it’s eventually sold or exchanged.

What Investments Are Eligible?

There is a reasonably broad list of qualifying investments. Real estate investors are pleased to learn that real property is included. Because a driving purpose of the law is to promote new business development in underprivileged areas, operating businesses qualify. An investor may make an equity investment in a business or purchase stock.

There is also a list of businesses that don’t qualify for the tax benefits. They include golf courses, country clubs, massage parlors, hot tub facilities, and suntan studios. They also include gambling facilities, including racetracks and casinos, and liquor stores.

How Do Investors Benefit?

You may invest money from any lawful source into OZ. But only capital gains from previous investments qualify for the tax benefits. Conveniently, investors may pool their money to create OZ funds and leverage their buying power. The requirements for pooling funds are surprisingly liberal. A small group of partners can pool their resources as well as a large group working through a professional fund manager. Funds may invest in virtually any real estate or qualifying business within the OZ.

Who May Benefit?

Both American and foreign national investors can participate. Anyone with a capital gain obligation may defer their tax payments by putting their money to work in an OZ. This list includes corporate entities, partnerships, trusts and estates.

The Tax Cuts and Jobs Act of 2017 brought Opportunity Zones to the investor community to encourage more capital infusion into the areas of the country that need it most. The hope is that such investment will drive growth while lowering unemployment and poverty rates. My investor clients are certainly excited about the tax benefits and many are looking more closely at deals within these areas. At Widerman Malek, we represent investors and entrepreneurs throughout the world doing business in Florida. If you want to take advantage of the Opportunity Zone chance to “do well while doing good,” contact me to learn more.