If you’re an investor, then you have likely heard about the opportunity zones tax incentive. The qualified opportunity zone program is a product of the Tax Cuts and Jobs Act of 2017. The purpose of this program, passed by former President Trump’s administration, is to enhance economic development and job creation in the country’s low-income parts. The opportunity zones offer tax benefits and increased profit to business and individual investors. Be that as it may, before you invest in opportunity zones, there are a few things you must know.
- What is a qualified opportunity zone?
After the recession, most areas across the country did not recover economically. The development progress is slow, and the unemployment rate is high. Therefore, a qualified opportunity zone is any community in the country that is still experiencing economic challenges and low development.
Congress established the first opportunity zone at the beginning of 2018. Since then, more than 8.000 opportunity zones have spread across the 50 states and the countries under U.S possession. - Why invest in a qualified opportunity zone?
As an investor, you are looking for opportunities that will generate more profit. However, according to the country’s tax laws, this profit can also be liable for the tax. But investing in qualified opportunity zones can exempt you from some of these taxes. Opportunity fund real estate companies file tax returns and exempt QOZ investors. QOZ investors receive preferential tax treatment; you can move your capital gains into the Qualified Opportunity Fund, which allows you to defer the tax over a while.
Another exciting thing is, depending on the length of your investments, the fund can exclude part of the deferred gains. If you maintain the QOF for five years, you can receive 10% exclusion, and in 7 years, it increases to 15%. Therefore, investing in a QOZ is a reliable long-term investment.
You should also note that you will need to move your funds within 180 days for the capital gains to defer the capital gain. - How to invest in a qualified opportunity zone
Before investing in a QOZ, it is advisable to invest in a qualified opportunity fund. You can either create a QOF or invest in an existing one. If you’re establishing a new QOF, at least 90% of your capital gains will go into a qualified opportunity zone. Therefore, you need to keep your assets to avoid mixing everything up. Ensure your investment goes through a due diligence process and find opportunity zones with excess land to accommodate expansion.
It would help if you considered some of the other things before investing in an opportunity zone including, population, growth rate, income, demographics, property inventory, businesses, and the rental absorption rate. However, keep in mind that these opportunity zones cannot be the same. What works for one investor may pose a challenge for the next one. Lastly, remember that you can find opportunity zones outside of the economically-distressed parts of the country. Galena partners can help find a list of suitable opportunity zones in the Northwest communities and various parts of the country.
Galena Equity Partners also run a qualified opportunity fund that allows investors to impact the community. If you are looking to become an impactful investor, you can check out their website for more information.