You may have heard of thing or two about Opportunity Zones, but do you really know what they are? These are a pretty great, well, opportunity for many people, but especially for investors. So, if you’re looking to expand and diversify your portfolio in a new way, you should make sure that you know all about Opportunity Zones and what they may offer you. To help you out, we thought we would go over the basics of Opportunity Zone investing.
What is an Opportunity Zone?
Let’s start with a basic definition of Opportunity Zones. They were created by the Tax Cuts and Jobs Act of 2017. They are areas designated by the government that are struggling economically. If investors invest in businesses in the area, they can receive certain tax breaks. The idea behind this is to help spur on job creation and economic growth in areas that have struggled with these things. Opportunity Zones are created through nominations submitted by the governor or chief executive of that state. They can nominate up to 25% of the low-income census of their state and it needs to be approved by the Secretary of the Treasury. These zone designations are final and will not be changing anytime soon. These designations were finalized on December 14, 2018. You can see a map of where all of the Opportunity Zones are here.
Of course, while defining Opportunity Zones, we also need to define Opportunity Funds and Opportunity Zone properties. Opportunity Funds are investment vehicles that are either corporations or partnerships. They are the ones who can invest in the properties in the Opportunity Zones. Opportunity Zone properties are the businesses and real property that are in the Opportunity Zones that Opportunity Funds may choose to invest in.
How does a corporation or partnership become certified as an Opportunity Fund?
In order for your corporation or partnership to be considered an Opportunity fund, you need to file a particular form with the IRS. You also need to keep a majority of your fund’s assets in the Opportunity Zone property you want to invest in. This amount needs to be at least 90%. If you’re part of an LLC that is interested in becoming an Opportunity Fund, no worries. LLCs can choose to be treated either as a corporation or a partnership in order to be considered an Opportunity Fund.
It is important to note that you cannot invest in an Opportunity Zone property unless you go through an Opportunity Fund. No individual investor can invest their assets the property and still expect the tax benefits. In order to experience the full benefits of Opportunity Zone investing, you must have funds in an Opportunity Fund.
What are the benefits of investing in an Opportunity Fund?
As mentioned, there are some tax benefits available to Opportunity Funds. To be more precise there are three main benefits that member of Opportunity Funds may take advantage of. One is that the investor may choose to defer paying taxes on their capital gains until the end of the year 2023. Another is if an Opportunity Fund investor keeps 90% of their assets invested in the Opportunity Zone property, they will receive a tax basis increase of 10%. This means that only 90% (rather than the whole) of their capital gains will be taxed. The final benefit is that if the 90% of the assets are left in the Opportunity Zone property for at least 10 years, the capital gains will not be taxed on any appreciation of the assets. So, as you can see, there are some pretty tempting reasons to create an Opportunity Fund.
It is a common misconception that in order to get the tax benefits that come with investing in an Opportunity Zone you must live in the area of the Zone. However, this is not at all true. You don’t have to live, work, or own property in that area. The only thing you have to do to get those benefits is invest in the are through an Opportunity Fund, see a gain on that investment, and then take advantage of the benefits.
What can an Opportunity Fund invest in?
There is quite a range of things that an Opportunity Fund can invest in. They essentially need to be able to fill whatever need the community in the Opportunity Zone may have. These needs could be business costs, equipment, or real property. A common form that this takes is original-issue stock of a company in that area.
Bear in mind, that Opportunity Funds are not limited to one Opportunity Zone property. An Opportunity Fund can invest in several different properties in Opportunity Zones, as long as they have at least 90% of their assets in the properties, whether spread out or focused.
So, there you have the basics of Opportunity Zone investing. It’s not hard to see why so many people are interested in these investments. They give you a chance to diversify your portfolio, with some major tax benefits. Not only that, but you also get a chance to help areas that are struggling economically expand and build. That’s not only fantastic for that area, but also could help boost our national economy. It really is a win-win all around.
We hope that this article has helped you better understand Opportunity Zones and what investing in them may do for you. However, if you have any other questions about Opportunity Zone investing, you can check out some resources here:
- IRS FAQ on Opportunity Zones
- US Treasury Proposed Rules on Opportunity Zones
- Internal Revenue Code §1400Z–2. Special rules for capital gains invested in opportunity zones
- CDFI Fund Opportunity Fund Resources
Or you could reach out to us here at CrowdEngine. Though our focus is on crowdfunding, we are experts in all things finance and investing. We can help answer questions and clear up any confusion you may have. We would love to hear from you. Also, you can read about our advice on Opportunity Zone investing here.
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