skip to Main Content
What To Know Before Investing In Opportunity Zones

What to Know Before Investing in Opportunity Zones

Opportunity Zones present an excellent opportunity for investment. These zones were created to encourage investors to stimulate economically distressed communities. If you’re considering investing in an Opportunity Zone, the following are a few important things of which to take note before making the plunge. 

Regulations and Compliance

For you to maximize the benefits of investing in Opportunity Zones, you need to ensure that you comply with every requirement. Attention to detail is crucial. All Opportunity Zone investments need to take place through a  direct investment into a QOZ (Qualified Opportunity Zone) entity or indirectly through a QOF (Qualified Opportunity Fund). You will also need to improve the property substantially, or the use of the property needs to begin with the QOF. QOFs also need to hold at least 90% of assets in opportunity zone property and have the percentage re-tested every six months. A business based in an Opportunity Zone needs to earn at least 50% of its total income from activities located in the zone to qualify. 

Following the many regulations requires meticulous research. Make sure you correctly understand all regulations before you invest. 

Tax Benefits

Normally when someone invests in stock or real estate and then makes a sale, any capital gains are liable for taxes. If applicable, however, capital gains can be moved into a Qualified Opportunity Fund (QOF) within 180 days of the sale. If the property meets the requirements for Opportunity Zones, federal taxes on these gains can be deferred until 2026. If the investor holds the QOF for over five years, they receive a 10% exclusion of the deferred gain. If the investment is held for over seven years, they receive an additional 5% exclusion of the deferred gain, and if they hold the investment for over a decade, it is eligible to have any gains from the QOZ or QOF investment exempt from federal taxation. 

Potential for Future Growth

Every Opportunity Zone is different and will offer unique advantages and challenges. What is a good fit for another investor may not be right for you. Before deciding where to invest, take some time to determine which metrics are most important to you, and work with a professional tax advisor familiar with the new regulations.  While opportunity investing has significant tax advantages for current capital gains, you should evaluate the long-term potential of the investment, as many areas are rapidly changing.  In many instances that change is being accelerated by this new tax law and will ultimately be accretive to investment returns and tax efficiency as compared with current assumptions, offering potential upside potential.  Don’t only underwrite the investment based on current statistics and variables but also factor in how much the investment will be impacted by these demographic changes. Consider factors such as change in population, investment, demographics, jobs, and rental absorption rates. 

Investing in Opportunity Zones is not only a great method of generating income, but the action is a terrific way to make a difference in underdeveloped communities. Although there are many factors to take into consideration, there are also many benefits to investing in Opportunity Zones.