3 Reasons You Need to Invest in Opportunity Zones

There are big changes coming. President Joe Biden has proposed a significant increase to capital gains taxes and the 1031-exchange program is set to be removed for those making greater than $400,000 per year.

These are big changes, however lost in the doom and gloom is the announcement of the Opportunity Zone Extension Act of 2021. So yes, taxes are going up, but there is an opportunity to perhaps pay significantly less taxes if you are smart.

Qualified Opportunity Zones were created in 2017 as part of the Tax Cuts and Jobs Act introduced by former President Donald Trump. Opportunity Zones (OZs) are defined as “economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” Each state determines and applies for opportunity zone designation based upon local income, census, and other factors. As of today there are 8,760 qualified OZs across all 50 states.

The best way to invest in opportunity zones are to invest via a Qualified Opportunity Zone Fund (QOZF) and here are three reasons you need to invest your hard earned money in them.

1. Defer capital gains taxes and get a great return while doing it.

Opportunity zone funds offer similar, and in my opinion, better benefits than 1031-exchanges. While 1031-exchanges require you to invest the proceeds from a sale into a new like-kind investment, QOZF allow you to pull out the cost basis for the original investment and reinvest only your earnings following a sale of an asset. Additionally those assets are not limited to real estate unlike 1031-exchanges.

If you want a great example on how this would work, check out Michael Kitces article, “Using Qualified Opportunity (Zone) Funds To Minimize Capital Gains”.

2. Invest long enough and get a basis step-up of invested capital gains.

As an investor if you place your capital gains in an QOZF and hold for 5 years you’re rewarded with an 10% increase in the cost basis on the funds invested. Another way of saying this is only 90% of your original capital gains is subject to taxation. If you hold an additional 2 years, meaning 7 years invested, only 85% of your original investment is subject to taxation.

3. NO taxable income on new gains.

This is the icing on the cake, the ability to pay ZERO taxes on your capital gains generated from your original investment if it is held for 10 years.

QOZF can be used to fund and finance commercial and industrial, real estate, housing, infrastructure, existing or start-up small businesses. Your investment can make a significant impact in re-vitalizing low-income areas, directly or indirectly creating jobs and helping to boost the local economy. As a benefit to your passive investment you receive the benefit of generating a great return and lower your tax burden. That’s a win-win in my opinion.

If you’re interested in investing in an opportunity fund or learning more, send me an email at contact@surgifi.com.

As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.