How to invest in opportunity zones
Participating in an opportunity zone and the preferential tax treatment they offer is done by placing qualified capital gains in an Opportunity Fund. Opportunity Funds are pooled investment funds that follows specific requirements to gain this designation and there are several opportunity funds to choose between.
Eligible capital gains can be realized from the sale of stocks, bonds, private business, or real estate. Accredited investors can participate in the preferential tax treatment opportunity zones offer by rolling their current capital gains into a qualified OF within 180 days from the sale of the asset in addition to filing IRS form 8949 with their taxes. Non qualified capital gains funds can also be invested in an OF, but that money will not be eligible for the same tax incentives.
A qualified opportunity zone fund is a private fund structured as a corporation or partnership that invests more than 90% of its capital into an opportunity zone. A recent ruling stated that a fund’s failure to meet the 90% asset test would not disqualify them from being classified as an opportunity fund, but may result in a penalty.
The fund can invest in any qualified asset, which may be real property, equipment, or a business where 50% or more of their income is derived from an opportunity zone. If property is purchased, the OF needs to make “substantial improvements” to the property within the first 30 months. OFs are subject to review at six-month and year-end intervals to ensure compliance with regulations and requirements.
The number of OFs is consistently growing, which provides accredited investors interested in participating in this tax shelter with a number of options. Novocgradac created a list of the current opportunity funds available to invest in with their targeted geographic area and investment focus. Every opportunity fund works differently, targeting various asset types in distinct opportunity zones. Similarly to a crowdfunding investment, the opportunity fund should provide an offering memorandum (OM) which outlines the investment opportunity, market summary of that specific opportunity zone, economic outlook, and projected performance.
However, it’s essential the investor verify the feasibility of the investment and feels comfortable with the structuring of the fund and its holdings. It’s also important to see what other assets the fund has managed or completed. While this is no guarantee that the opportunity fund will succeed, it does show that the fund has a track record and experience in the business.
What risks are there when investing in opportunity zones?
As with any investment, there are risks with investing in opportunity zones. The largest is the viability of the investment in that zone. Just because there are tax incentives to place money in certain areas, it doesn’t mean every investment will be profitable. The location and type of investment matters. Look for a fund that has diversified assets across different opportunity zones.
Additionally, for investors to take full advantage of the tax incentives offered with opportunity zones, they need to roll a portion of their capital gains into an opportunity fund. This can reduce the diversification of the investor’s portfolio during this period, which can increase exposure to risk. If you are interested in investing in opportunity zones, continue learning about opportunity zones, the risks involved, and start the search for potential opportunity funds to work with. Make sure the opportunity fund is following the required rules and guidelines in order to keep the designation of a qualified OF and be able to take full advantage of the tax opportunities available as one.
This economic development tool and tax haven holds massive potential for those involved. If opportunity zones work as intended, they will offer tax incentives to investors shifting capital into undercapitalized communities of the country. If you are interested in investing in an opportunity zone, it’s important to identify a fund to invest in sooner rather than later to take full advantage of the tax incentives available. There are high hopes for a positive impact in areas of need as this investment opportunity continues to unfold over the next decade.
What qualifies as an Opportunity Zones?
In order to be deemed an Opportunity Zones, an area must have been nominated for that designation by their state and that nomination has been certified by the IRS. Additionally, for real estate developments to qualify for opportunity fund financing, the investment must result in the properties being vastly improved, by the government’s terms.
Opportunity Zones were first rolled out in April 2018 and included 18 states. Since that time the program has expanded and covers all 50 states.
According to the Treasury Department, close to 35 million Americans live in communities designated as Opportunity Zones. Based on data from the 2011-2015 American Community Survey, the designated census tracts had an average poverty rate of more than 32%, almost double the 17% rate for the average U.S. census tract.
Moreover, these Opportunity Zones are also twice as likely as other U.S. communities to be located within a county that has suffered from persistent poverty. This means the county has experienced a poverty rate of at least 20% for 30 years.
How to find an Opportunity Zone
Opportunity Zones are shining the spotlight on parts of the country that have been typically passed over when it comes to investing. Although it may seem like a daunting task, finding an Opportunity Zones, especially through a qualified Opportunity Zones map, is easier than you think.
Take a peek at the list of designated qualified Opportunity Zones in IRS Notices 2018-48 (PDF). The list is organized in alphabetical order by state and includes all of the population census tracts that the Treasury Secretary designated as Opportunity Zones.
In order to find out if an investment is in an Opportunity Zones, you can search by address online using the Census Bureau’s Geocoder tool to determine the census tract in which a specific address lies. You can also then use the Opportunity Zone mapping system or the list of designated Qualified Opportunity Zones to determine the status of that census tract.
To stay abreast of updates to Opportunity Zones, one public policy group that played a role in creating the program, the Economic Innovation Group, created a resource page that links to an interactive map and state-by-state Opportunity Zones updates. On this site you can explore an individual state’s Opportunity Zones program, such as how many areas received the designation as well as the population and employment statistics in each zone.
The EIG has estimated that more than $6 trillion of potential capital gains are eligible for the program.
Smart Growth America’s LOCUS published a National Opportunity Zone Ranking Report. The report noted that it ranks each of the designated Zones based on its Smart Growth Potential (SGP) as well as its Social Equity + Vulnerability Index score (SE_SVI). It includes a smart growth potential filter for investors to identify which Opportunity Zones should be prioritized for investment from a triple-bottom-line perspective that can deliver positive economic, environmental, and social returns.
The group created the report to give local policymakers and community groups a plan to manage and ensure equitable, inclusive development in Opportunity Zones.
The Urban Institute also offers a state-by-state analysis of Opportunity Zones. This includes homeownership rates, ethnicity, and education levels.