As with any new investing structure, the latest initiative called Opportunity Zone investing might have you wondering if it’s worth including in your investing portfolio. 

Maybe you’ve heard how Opportunity Zones offer exciting tax incentives to help boost economic growth in underdeveloped communities. The incentives involve a temporary tax deferral (until 2026 at the latest) on Original Capital Gain that you invest in a Qualified Opportunity Fund (QOF). Here’s how this plays out:

• 5 years invested = 10% reduction in Original Gain Tax Basis.
• 7 years invested = 15% reduction in Original Gain Tax Basis.
• 10 (or more) years invested = 15% reduction in Original Gain Tax Basis and no Capital Gains Tax on the appreciation of your investment in a Qualified Opportunity Fund!

The incentives have attracted major interest among investors. Yet, there are a few questions as to how some details of the program will work. If you’re still unsure whether or not you want to get involved, let’s break down the benefits and challenges.

Opportunity Zone Benefits

Beyond tax incentives, the Opportunity Zones (OZs) initiative was designed to provide several key characteristics to attract investors and benefit underdeveloped communities:

• Flexibility: The OZ program doesn’t restrict investor capital to a single type of investment. Instead, the flexibility of the OZ program makes it possible to address the wide variety of financial needs faced by low-income communities as a whole. For example, you can join a QOF that invests in your desired asset class—whether that is solely residential or both residential and commercial properties. A QOF could also be invested in startup businesses in Opportunity Zones. Keep in mind, even businesses are needed in such zones in order to work together to reinforce economic growth.
• Scalability: Unlike other investment vehicles, including IRAs, there’s no limit on how much capital you can invest in an Opportunity Zone each year. Essentially this means that, through this incentive structure provided by the federal tax regulation, the economy of low-income communities has the potential to grow at an unknown, never-before-seen rate.
• Simplicity: The OZ program is clear-cut and straightforward. There aren’t any legal hoops you have to jump through to get into a QOF or any confusing fine print as to what an Opportunity Zone includes. The simple design of the OZ structure reduces the risk, time, and cost that made more complex investment incentives fail to inspire a similar aim at economic growth in underdeveloped communities.
• Frees-up money: It unlocks scarce equity capital from private investors and provides enough of an incentive to sell current investments to reinvest with those capital gains.
• Market-oriented: It allows investors to move at the speed of business, rather than getting caught up with business model limitations.
• Relieves taxpayers: It rewards successful investments in the future, rather than providing a subsidy up-front. This shifts the burden of risk from taxpayers to investors.
• Accessible: The fund model allows for broad participation across all familiar asset classes.
• Economically dependable: It can provide an anchor for local economic development strategies to attract needed private capital.

Opportunity Zone Challenges

There are a few challenges everyone involved is still trying to figure out, which bring up questions that might make investors hesitant to participate. For example, there is a question as to how the government will ensure that the overall intention of the initiative to build community in underdeveloped areas and the balancing out of city zip codes will be accomplished. The Opportunity Zones Coalition and the Treasury are still ironing out the kinks. Here are more of the challenges that need to be further defined:

• Regarding the project level, it’s determined that leveraged dollar gains won’t receive the tax benefit, but it’s not clear how benefits through leverage will be treated.
• How improvement provisions will be made for larger real estate investment projects that take over 30 months.
• The phrase “substantially all” has been defined in certain parts of the statute as 70%, while in other areas it hasn’t yet been fully defined.
• How long the “reasonable period” is for a QOF to reinvest proceeds from the sale of qualifying assets?
• What the administrative rules are when a QOF fails to invest 90% of its assets into qualified OZ structures.

A federal tax incentive like this is huge for investors and can pose a large impact on our communities. Of course, with every new and complex initiative, there are always remaining details to sort out. Even so, we are certain the benefits of this great incentive program prove to offer exciting possibilities to investors and will achieve its goal to promote the underdeveloped communities inside Opportunity Zones—which will benefit everyone in the end.

How Do I Start Investing in Opportunity Zone?

If the Opportunity Zone benefits outweigh the challenges for you, we’d be excited to offer a free consultation to help you decide if you’d like to expand your portfolio. We can help you scout OZs and find your best-fit Qualified Opportunity Zone Fund. Connect with our investment professionals today!