How Opportunity Funds Benefit Investors and Communities
- Posted: April 30, 2019
- Posted by: Travis Lynk
- Last Reviewed: April 30, 2019
The Opportunity Zone program incentivizes capital flows into economically depressed communities. A newly created asset class under the 2018 Tax Cuts and Jobs Act, Opportunity Zone projects may be a game-changer for distressed communities and the national economy. The program presents investors and developers with tax-favored opportunities to do well by doing good.
The Economic State of Opportunity Zones
Economic growth since the 2008 recession has been anything but equitable, with benefits accruing primarily to select metropolitan areas. This is a major contributor to the alarming growth in income inequality. For the one-third of Americans who live in the bottom 40% of ZIP codes when measured by median salary, economic growth is scant. Poverty-stricken areas have seen few gains in employment rates and general economic well-being; this is evident in mortality, public health, education, and addiction rates.
When economic opportunities fail to reach those suffering from these inequities, the country as a whole suffers, both socially and economically.
The Potential of Opportunity Funds
The 2017 Tax Cuts and Jobs Act created new incentives for investors to funnel the estimated $6 trillion in unrealized capital gains into Opportunity Zones. Opportunity Zones are economically distressed census tracts designated by the U.S. Department of Treasury. There are Opportunity Zones in every state and five U.S. territories.
Provisions in the Tax Cuts and Jobs Act create powerful tax incentives for investors to put their capital gains to work funding development projects in Opportunity Zones by investing in Opportunity Funds. Opportunity Funds are structured to bring capital to the development arena in a less restrictive way than other programs, such as the EB-5 Immigrant Investor Program.
Opportunity Funds are investment entities that must invest at least 90% of their capital in Opportunity Zone projects, including businesses and real estate developments. Investors with realized capital gains can reduce and defer capital gains taxes by investing those gains in Opportunity Funds. Investors who maintain their investment for at least five years defer capital gains taxes and receive a step-up in basis of 10%; after seven years, investors receive a further step-up in basis to a total of 15%. Investors who hold Opportunity Fund assets for at least 10 years are exempt from all capital gains taxes on the appreciation of those assets.
The immediate and long-term tax benefits of the program make it attractive to many types of investors. Equally important, Opportunity Funds have the potential to make a rapid and dramatic impact on the communities in which they invest.
Non-Tax Benefits of Opportunity Funds
The Opportunity Fund investment lifecycle affects multiple stakeholders: taxpayers, investors, fund administrators, developers, entrepreneurs, and communities and their residents. Minimum certification requirements lower barriers to investment and there are no limits on investment amounts, making the potential pool of capital very deep. Because Opportunity Zones exist across the country, opportunities for meaningful developments are expansive.
Opportunity Fund investments are long-term and patient, closely aligning investor goals with those of developing Opportunity Zone communities. The benefits of an Opportunity Fund are thus likely to endure long after the Fund is closed. The Opportunity Zone program has the potential to be a boon for investors and communities alike.