Arguably one of the hottest topics for impact investors in 2019 is that of Opportunity Zones. Along with the tax overhaul bill that was passed in 2017 came the Investing in Opportunity Act, which established the new Opportunity Zone program, consisting of Opportunity Zones and Opportunity Funds X.
What are Opportunity Zones and Funds?
According to the IRS, an Opportunity Zone is an economically-distressed community where new investments may be eligible for preferential tax treatment, while an Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an Opportunity Zone X. This should be really exciting for aspiring and existing impact investors!
Operating under the impact investing definition of directing capital to enterprises that generate social or environmental benefits, as well as financial gain X, impact investing is particularly compatible with Opportunity Zones and Funds—investors get federal tax breaks, while impoverished neighborhoods get new businesses and upgraded properties, like apartment buildings, retail shops and hotels X. There are 8,761 census tracts designated as Opportunity Zones and 35 million Americans who live in Opportunity Zones, so this could potentially impact a significant portion of the population and some of the most marginalized communities X.
Under this law, investors get to postpone taxes on profits or exclude from tax altogether any gains from the investment under different conditions.
For example, one would be permitted to delay the capital gains tax on a stock market profit until 2026, if these capital gains are invested in an Opportunity Fund which, in turn, invests in property in an Opportunity Zone. Moreover, one may exclude 15 percent of that gain from any tax if the fund investment is held for 7 years and completely exclude the gain on any further appreciation of said investment if the fund is held for 10 years X. Opportunity Zones retain their designation for 10 years, but investors can hold on to their investments in Opportunity Funds through 2047 without losing the tax benefits X. That’s as beneficial as tax reforms come.
The excitement toward Opportunity Zones shouldn’t come without reservation though.
In the infancy of the program, mistakes have already been made, including but not limited to people contracting property under the guise that they are in Opportunity Zones, to only find out after closing that there were errors on the maps they initially used X. What’s most concerning though, is that the IRS has yet to publish a complete set of federal regulations X. Likewise, the jury is out on the impact of Opportunity Zones and will be for some time, as Congress asked the IRS to begin reporting on the operations of the program no sooner than 2022 X.
If you’re an investor looking to have an impact on the community in 2019 and beyond while keeping more money in your pockets, investing through an Opportunity Fund within an Opportunity Zone may be a good vehicle for you! Before you rush into it though, make sure it is through a qualified fund, make sure the business or property is eligible, get and remain familiar with the emerging federal regulations, and be on the lookout for reports on the operations of the program in the coming years.