There has been a lot of talk the past few months about Opportunity Zones. Below is more information on Opportunity Zones and how you can take advantage of its benefits.
What are Opportunity Zones?
The U.S. Investing in Opportunities Act of 2017 established new tax incentives for investments in designated underserved communities. These selected areas, chosen by state and local governments, are known as Opportunity Zones. When an investment is made in an Opportunity Zone through a qualified Opportunity Fund, the investor is allowed to hold off on (or avoid altogether) paying the relevant capital gains tax. The program is designed to support economic growth and job creation in low-income areas.
Where are they and how are they chosen?
Opportunity zones are nominated by state governments and officially designated by the U.S. Treasury. Their boundaries are based on existing census tracts, which are essentially neighborhoods of between 1,200 and 8,000 inhabitants. There are 879 Opportunity Zones in California, spread out between 57 of the state’s 58 counties.
Designated Opportunity Zones tend to have lower incomes, lower education, more unemployment, and higher poverty rates than surrounding areas. The idea is that investments through Opportunity Funds will benefit social mobility and economic growth within these populations rather than encouraging unwanted gentrification.
What’s the advantage for investors?
Investors can invest capital gains from any asset source into an Opportunity Fund, which is then used to invest in businesses, property and equipment within Opportunity Zones. Opportunity Funds are designed to be flexible in meeting the needs of different communities, but at least 90% of the fund’s assets must be held in qualifying property.
By transferring assets to an Opportunity Fund, the investor avoids paying capital gains taxes on that money right away. The taxes are deferred until the end of 2026 (or until the assets are disposed of). There are also incentives for leaving the investment in the Opportunity Fund for certain lengths of time; after five years, the investor’s basis on the original investment grows by ten percent. After seven years, that incentive increases by 15 percent. After 10 years, the capital gains taxes on the original investment are waived. Because of this biggest incentive, many lenders are looking to invest by the end of the year.
What’s the advantage for communities?
Basically, Opportunity Funds provide access to private funding for communities that need it to provide affordable homes, job growth and infrastructure. Communities are responsible for proposing their own goals and projects that will qualify for funding through the program. It’s important to remember that in order to be successful, projects must be good for the growth of the existing community and profitable for investors. For more information on getting an Opportunity Zone ready for funding, visit opzones.ca.gov.
How will Opportunity Zones affect my property?
If you own property within an Opportunity Zone, you may qualify to receive Opportunity Fund investments. Talk with your mayor or other local community leaders about your goals for the community. For example, if you see an opening for job growth related to your business, or you’re interested in converting your unused property into low-income housing for local residents, make it known. It’s up to community leaders to decide which projects are best for both residents and investors.
Even if you don’t directly receive Opportunity Fund investments, your property or business could be positively affected by economic growth. Stay in touch with neighborhood leaders and keep an eye out for ways to support the growing community in the coming years.
Still unsure of what to do? DCG Strategies can help advise you on the best course of action for your underused Opportunity Zone property.