The US government has instituted an initiative that investors can take advantage of to receive unique tax benefits, while also making a positive impact on the community around them: Opportunity Zones.
“Designed to reward investors for their contributions to communities in need of revitalization, savvy investors have begun to realize the benefits of investing in Opportunity Zones — from the ability to defer taxes on capital gains to the potential to create tax-free income if investors play their hand properly,” asserts Ashley Tison, attorney and co-founder of OZPros.com.
What Opportunity Zones mean for local communities
Opportunity Zones are an economic designation for communities created by the Tax Cuts and Jobs Act of 2017 for economically distressed communities, as defined by individual census tracts. After a nomination from the governor and certification by the US Secretary of the Treasury, areas designated Opportunity Zones can then be eligible for preferential tax treatment. As of now, there are 8,764 Opportunity Zones, many of which, according to the US government, “have experienced a lack of investment for decades.”
The government created Opportunity Zones as a tool to encourage businesses and high-dollar private investors to invest in economically distressed areas in the United States. The result would therefore be spurred economic growth and job creation in low-income communities, as investors are drawn to these areas by the government’s offer of tax benefits. Studies have shown that this initiative is effective, with results such as increasing home values by as much as 3.4% without contributing to an increase in rent prices.
What Opportunity Zones mean for investors
For investors, the immediate advantage of investing in Opportunity Zones is the ability to defer capital gains taxes. “If an investor reinvests their capital gains into a qualified Opportunity Zone fund within 180 days, the taxes on these gains can be deferred until December 31, 2026, or when they sell their OZ investment — whichever comes first,” Tison explains. “The result is that investors could benefit from greater overall returns, as they are able to maintain more capital upfront to pursue further investments.”
But the most significant advantage of investing in Opportunity Zones is for investors who hold their Opportunity Zone investment for over 10 years, since any capital gains earned from the appreciation of that investment are entirely tax-free. “Because of the combination of these two tax benefits, investors have the chance not only to see capital gains reduction, but also to create tax-free income and sell the asset without capturing the depreciation as income,” says Tison. “In other words, by investing in Opportunity Zones, investors can accumulate substantial wealth and maximize returns, all while reducing tax exposure and generating positive social impact.”
The profound and widespread impact of investment in Opportunity Zones
However, the advantages of Opportunity Zones don’t stop with their tax favorability. Indeed, investors who take advantage of Opportunity Zones have the potential to make a profoundly positive social impact.
Because Opportunity Zones are areas with high poverty and low median household income, putting money into these communities can contribute to an increase in residential and commercial development. Beyond that, studies have shown that communities close to areas designated as Opportunity Zones have also experienced a sort of outward economic growth.
Investors also have the chance to take advantage of other incentives that can be applied in conjunction with the tax advantages from Opportunity Zones. For example, the Solar Investment Tax Credit (ITC) can be paired with the OZ incentive if the developments make use of solar power and renewable energy technology. The recent Small Business Jobs Act also has the opportunity to increase the positive impact of Opportunity Zone investments by increasing the map of areas that can be designated as OZs, as well as increasing transparency in reporting regarding the economic impact of these investments.
With this, it’s clear that the Opportunity Zones program not only has the potential to offer investors significant tax benefits, but also the opportunity to make a positive impact on the community. Although some critics have called attention to the fact that the initiative does not provide direct support to the community, the indirect support they receive from the economic development in the area is substantial and, oftentimes, can have much broader reaching positive results than direct support.
“By investing in these communities in need of economic support, investors in opportunity zones will encourage economic growth in these areas and create jobs at the same time,” Tison concludes.
