Across the United States, there are thousands of distressed rural neighborhoods in need of renewal. One aim of the Tax Cuts and Jobs Act, which was passed in December 2017, was to help combat this problem by bringing capital to low-income areas. Through the program, the federal government identified distressed areas -- which are known as "qualified opportunity zones" -- and specified several tax incentives for investors to put capital into these neighborhoods.
There are currently more than 8,700 opportunity zone communities -- both urban and rural -- that need capital investments to help boost their economies, and rural areas account for 40% of those opportunity zone neighborhoods.
What are the benefits of investing in rural opportunity zones?
When an investor sells an investment property, they are required to pay a capital gains tax on the amount that the asset has appreciated -- which can be quite costly. When an individual chooses to invest in a qualified opportunity zone, however, they can defer (postpone) the capital gains tax until December 31, 2026, or until they decide to sell the property in the qualified opportunity zone -- whichever comes first.
There is also a variety of tax incentives depending on the amount of time the investor holds onto property that’s in a qualified opportunity zone. If the investor holds onto the property for five years, their capital gains taxes will be reduced by 10%. If they hold the property for seven years, until 2026, there will be an additional 5% reduction in capital gains taxes, totaling 15% (although the investment must take place by the end of 2019 to qualify). If the property is held for 10 years, the investor will not be responsible for paying any capital gains tax.
Companies focusing on rural opportunity zones
Although the opportunity zone program targets both urban and rural neighborhoods throughout the U.S., all of which can be accessed here, there are funds available that focus solely on investing in rural opportunity zones.
Rural COZ is an opportunity zone fund that invests in rural areas in Colorado. Rural COZ primarily focuses on real estate built by established developers and is analyzing real estate investments ranging from multifamily residential to hotels and mixed-use. Their philanthropic mindset plans to bring attainable housing, infrastructure, jobs, and service to rural communities that have been overlooked in Colorado.
Rural opportunity zones in Kansas
There are nearly 80 counties in the state of Kansas that have been designated as rural opportunity zones by the federal government. Although an investor does not need to be a Kansas resident to invest in one of the state’s rural opportunity zones, the state has been authorized to provide additional financial incentives to investors who choose to reside in a Kansas-based rural opportunity zone. These benefits include Kansas state income tax waivers for up to five years and student loan repayments of up to $15,000 over five years.
A map of all rural opportunity zones in Kansas can be found here. To be eligible for the aforementioned Kansas income tax waivers, individuals must have:
- Established residency in a rural opportunity zone county after July 1, 2011
- Lived outside of Kansas for five or more years prior to establishing residency in a rural opportunity zone county
- Earned less than $10,000 in Kansas source income in the five years prior to living in a rural opportunity zone county
For those interested in the student loan repayments, individuals must have established residency in a rural opportunity zone county after July 1, 2011, and after the date at which the county has opted into the student loan program. Additionally, they must also hold an associate's, bachelor's, or postgraduate degree and have an outstanding student loan balance.
KQOZLF LLP is a rural opportunity zone fund that focuses on livestock (cattle) startup businesses in rural, low-population agricultural communities in Kansas and Colorado. The plans optimize beef production and protect the environment while producing a high-value product.
How does an area qualify as an opportunity zone in the first place?
To qualify as an opportunity zone, an area must meet the following requirements as defined by U.S. Internal Revenue Code Section 45D(e):
- The area must have a poverty rate of at least 20%
- If not located within a metropolitan area, the area cannot exceed 80% of the statewide median family income.
- If located within a metropolitan area, the area cannot exceed 80% of the greater statewide median family income or the overall metropolitan median family income.
There are thousands of neighborhoods in need of renewal, and investing in rural opportunity zones is an attractive, tax-effective option for investors. Some rural opportunity funds, such as those based out of Kansas, not only offer significant tax incentives, but various other financial incentives as well, such as student loan repayment and income tax waivers. Prior to investing in any type of opportunity fund, it is strongly advised to conduct thorough due diligence and carefully research the fund to ensure it is a worthwhile investment.