What Makes an IRS Opportunity Zone?

By: , Contributor

Published on: Sep 11, 2019 | Updated on: Nov 22, 2019

Opportunity zones can be a boon to real estate investors. Here's what they entail.

When communities fall on hard economic times, they tend to grow increasingly neglected. After all, what real estate investor wants to pump money into a depressed neighborhood?

It's this very issue that prompted the creation of opportunity zones. IRS opportunity zones are those designated as economically distressed. Investors who put money into opportunity zones get to reap tax benefits in exchange for putting capital into areas that need it. Everybody wins.

When were opportunity zones created?

Opportunity zones were created by the 2017 Tax Cuts and Jobs Act. The goal of opportunity zones is to spur economic development and create jobs in areas that would otherwise remain neglected.

Why invest in opportunity zones?

The motivation to invest in opportunity zones lies in the tax savings involved. Investors have the option to put existing assets with accumulated capital gains into opportunity funds. These are private funds that invest at least 90% of their capital in opportunity zones.

Opportunity funds must invest in a manner designed to improve the opportunity zones. They can rehabilitate buildings and then lease them to businesses, for example. Investors can defer taxes on existing capital gains in opportunity funds until December 31, 2026, or until the assets are sold, if that happens at an earlier date.

Furthermore, investors who keep money in opportunity funds for at least five years can reduce their deferred capital gains tax burden by 10%. Those who stay invested in opportunity funds for at least seven years, meanwhile, can reduce their capital gains liability by 15%. Finally, investors who maintain opportunity fund investments for a total of 10 years pay no capital gains taxes on those investments.

The only way to get a piece of the opportunity zone action is to invest in one of these funds.

How to find opportunity zones

For an area to qualify as an opportunity zone, it must have a poverty rate of at least 20% or median family incomes of no greater than 80% of those of their surrounding areas. That area must be nominated for this designation by the state it’s located in. That nomination then needs to be certified by the Secretary of the U.S. Treasury via the IRS.

In other words, only truly economically distressed areas will ultimately qualify.

That said, there are currently more than 8,700 designated opportunity zones across all 50 U.S. states and the country’s various territories. Additionally, opportunity zones keep that designation for 10 years. Investors can access a complete list of opportunity zones via the U.S. Treasury Department's Community Development Financial Institutions Fund. The IRS maintains a list of opportunity zones as well.

Investing in opportunity zones is a good way to make money in real estate while helping communities in need. In fact, one might regard opportunity zones as a more socially conscious form of real estate investing. The fact that there’s a world of tax savings involved certainly doesn’t hurt, either.

Become A Mogul Today

Real estate is one of the most reliable and powerful ways to grow your wealth - but deciding where to start can be paralyzing.

That's why we launched Mogul, a breakthrough service designed to help you take advantage of this critical asset class. Mogul members receive investing alerts, tax optimization strategies, and access to exclusive events and webinars. Past alerts have included investments with projected IRRs (internal rates of return) of 16.1%, 19.4%, even 23.9%.

Join the waitlist for Mogul here and receive a complimentary 40-page guide on a NEW way to build wealth. Join waitlist now.

FREE - Guide To Real Estate Investing

The Motley Fool has a disclosure policy.