Want to invest in a meaningful project in your home state? In the spring of 2018, the U.S. Department of the Treasury and the IRS designated opportunity zones in several US states. New investments in these areas will be able to get preferential tax treatment. In other words, you and your community will both benefit!
Here’s what you need to know if you want to reap the rewards of these tax breaks.
What are opportunity zones and what are they for?
Opportunity zones are based on census tracts. Census tracts are simply small sections of a state that the government uses for analyzing populations, and they may coincide with cities, towns, or neighborhoods. To qualify as an opportunity zone, a tract has to have a poverty level of at least 20% or family incomes less than 80% of the median income in the area. That way, the program can target disadvantaged areas.
According to a release by the US Treasury, “The Tax Cuts and Jobs Act created opportunity zones to spur investment in distressed communities throughout the country.” In 2017 and early 2018, states and U.S. possessions nominated low-income communities to the program. Then, the Treasury designated and certified the opportunity zones based on the nominations. Find a comprehensive list of all the opportunity zones on the U.S. Treasury website.
How do they work?
First, private investors will invest in opportunity funds. Then, the resulting capital will be invested into opportunity zones in hopes of driving economic growth.
There are tax incentives for the investors that relate to the tax treatment of capital gains. Areas will remain as opportunity zones for the next 10 years. Therefore, if you hold your investment for 10 or more years, you will get the best tax treatment and the highest after-tax annual return.
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How can opportunity zones help me?
As a private investor, you’ll get to add promising long-term investments to your portfolio. Even in disadvantaged areas, there are plenty of new and existing businesses—as well as infrastructure and housing projects—that make for excellent investments.
Also, there are 3 tax incentives for investing in opportunity funds:
- Temporary tax deferral until 2026
- A step up in basis to help you avoid capital gains taxes if you hold the fund for 5-7 years
- No income tax on capital gains from selling or investing in an opportunity fund if you hold the investment for 10+ years
How will opportunity zones benefit communities?
When areas aren’t thriving economically, investors tend to overlook them. However, these areas have lots of potential. Basically, the hope is that opportunity zones will revive communities that need it the most. By investing in infrastructure, businesses, housing, and other projects, you can help local economies grow and thrive. Hopefully, over time, we’ll see a reduction in unemployment and poverty rates.
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How to invest in opportunity zones
At the moment, we still have to wait and see exactly how the government plans to implement the program. Currently, the Treasury is working on creating rules for investors and local agencies.
So if you have unrealized capital gains in your stock portfolio, look into reinvesting them into an opportunity fund in your home state. Also, plan to hold that investment for the next 10 years if you want to avoid paying capital gains tax on your investment.
Here are a few additional sources to check out:
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Also published on Medium.