The Ins And Outs Of Opportunity Investing


We saw congress establish the Opportunity Zones program when they passed the Tax Cut and Jobs Act in 2017. This ground-breaking legislation incentivizes private investors to take an active role in improving low-income communities throughout the US. Qualified Opportunity Funds (QOFs) enable you to impact struggling communities while you benefit from capital gains tax breaks and earn returns on your investment.

What is opportunity investing?

The Opportunity Zones Initiative entices you, as an investor, to funnel your money into low-income communities. Over 35 million Americans live within 8,800 census tracts referred to as Qualified Opportunity Zones (QOZs). These tracts are located in all 50 states, Washington, DC, and all five overseas territories. The need in these areas is clear: poverty rates average 32% in a QOZ, but only 17% in other US census tracts.

This initiative allows you to invest your capital gains in various ways. You may choose to put your money toward multifamily housing, retail development, industrial development, or brownfield redevelopment. Whether your investment may be in real estate, stocks, or equipment, it must meet these criteria:

  • The investment must be used in the trade or business of a qualified opportunity fund.
  • The investment must be acquired after December 31, 2017.
  • The investment must originally be used by the qualified opportunity fund in the opportunity zone or substantially improved by the qualified opportunity fund.
  • The investment must meet these criteria during the entire time it is held by the qualified opportunity fund or zone.

The legislation presents you with a variety of options. For example, you can fund a new or existing business if the company is used for purposes directly related to its community. You could also invest in a domestic company’s stock, as long as you purchase it at its original issue after December 31, 2017. You can acquire that stock directly or through an underwriter, though you must purchase it with cash.

As an eligible investor, you may be either an individual or part of a corporation, such as a real estate investment trust or a regulated investment company. Whatever the case, you must invest your capital gains in a qualified opportunity fund within 180 days of receiving it. If you fail to do this, you will need to pay the capital gains tax. After obtaining funds, you have 31 months to invest them into a qualified opportunity zone. 

The benefits of opportunity investing

The benefits for economically disadvantaged communities are clear, but how does this legislation benefit investors? Let’s take a look.  

If you hold your qualified opportunity fund investment for five years, your deferred capital gains will be reduced by 10%. To take advantage of this reduction, you must have invested your capital gains by the end of 2021. If you missed the deadline, you don’t qualify for the 10% break, but you can defer your capital gains payment until April 15, 2027; if you missed the 2021 cut-off but still want to invest capital gains in a qualified opportunity fund, you do not have to pay your taxes on that gain until April 2027.

The part of this program I refer to as the “magic sauce” is the 10-year hold period. If you hold on to your qualified opportunity fund investment for at least 10 years, all federal capital gains in excess of the amount recognized on December 31, 2026, will be completely tax-free. To help sweeten the deal, all the appreciation from your fund is tax-free.

In a nutshell, the benefits are:

  • You can reduce capital gains if you invested in a QOF before December 31, 2021.
  • You can defer capital gains taxes until April 15, 2027.
  • You can avoid taxes on the appreciation of your investment if you hold it for 10 years.

However, another benefit far outweighs everything previously mentioned. This legislation gives you the opportunity to improve the lives of over 35 million people living in low-income census tracts. That’s the kind of investment with benefits beyond the bottom line.


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