Opportunity zones have received extensive attention since the Tax Cuts and Jobs Act was signed into law in 2017. The federal government has designated these areas as zones of economic disadvantage. However, investors who put capital gains from qualified investments in these zones receive tax benefits.
Opportunity Zones real estate aim to spur investment in places with high potential but low investment activity. These areas also offer a good place for sourcing real estate at a discount. Here’s what you need to know about Opportunity Zones, including how they work and how you can use them.
How do Opportunity Zones Work?
Opportunity zones help increase the growth of certain areas and provide numerous benefits to their investors. Investors can make a 10-year capital gains investment in real estate located in the opportunity zones in exchange for a reduction in their taxes. Other benefits to the investors can include eliminating some capital gain taxes and tax deferrals. These advantages increase the capital working for them and the capital gain in the long term.
If you earn a certain amount in after-tax income from your investment, you can subtract the amount from your gross income when you file your taxes, meaning far less income tax to pay.
Consecutively, investors receive a break on capital gains taxes if they put the money into an Opportunity Zone. The idea is that giving people a tax benefit for investing in these places will help to attract new money and create jobs. This brings growth to the areas while still putting money on the investors.
Who Can Invest in an Opportunity Zone?
Individuals with capital gains in taxable accounts, at least 18 years old, can invest in opportunity zone real estate. You do not have to live in an opportunity zone to invest in an opportunity zone. In other words, any US taxpayers can invest in these regions.
The fund location should be in an Opportunity Zone. The location must be verified by the IRS and listed on the government's Opportunity Zone website. Additionally, entrepreneurs must have Qualified Opportunity Funds. These funds' registration is done by the IRS and certified by the federal government as an Opportunity Zone fund.
How Can You Invest In An Opportunity Zone?
If you have capital gains in taxable accounts, you have two options for investing those gains in opportunity zones:
- Put the gains in a designated opportunity fund
This is a type of fund managed by a fund manager. You can buy shares in the fund, and any gains from the fund are taxed as long-term capital gains.
- Put the gains in a qualified opportunity fund
The federal government has approved this fund to manage opportunity zone funds. The fund manager must also invest a certain percentage of its funds in the opportunity zone.
Opportunity zones are an excellent opportunity for anyone who wants to maximize long-term growth. Investment in these areas is a perfect way to access capital gains and benefits. Additionally, it is an excellent way of growing your financial portfolio while doing good for others.