There is an old saying that there are only two guarantees in life; everyone will die and everyone will pay taxes.
While there are currently no solutions for the death piece, there are opportunities to decrease your tax liabilities on capital gains.
A method that the United States Government often uses to incentivize change in the United States is to offer tax benefits.
The Tax Cuts and Jobs Act of 2017 created additional opportunities for real estate investors to both better their communities while reaping the tax benefits.
Within this law, investors are rewarded tax benefits for investing in Opportunity Zones, which are defined as distressed areas in the United States.
The goal of these investments is to ignite economic growth and opportunities in low-income areas. For investors, it serves as an investment vehicle with a unique and favorable tax treatment.
The idea here is to create a win-win opportunity.
The goal of Opportunity Zones is to reshape struggling cities across the United States.
In order to achieve this goal, Opportunity Zone investing helps create housing, commercial real estate buildings, and even infrastructure.
Although these investments will not drive all the change required in these cities, the hope is that they are the catalyst for additional change. Some changes that are hoped to be derived from these investment activities are an increase in job demand, decrease in unemployment, decrease in crime rate, increase in education, and a reduction in inequality.
Aside from the financial aspect of these deals, Opportunity Zone investing has the potential to make a difference in this world.
All 50 states in the United States have Qualified Opportunity Zones.
According to the US Department of Housing and Urban Development (HUD), there are 8,764 Opportunity Zones in the United States.
The most updated list of Opportunity Zones in the United States can be found on the Community Development Financial Institutions Fund page for the United States Department of Treasury.
The full list of designated Qualified Opportunity Zones was last updated on December 14, 2018.
The only way to participate in the Qualified Opportunity Zone (QOZ) Program is to invest in Opportunity Zones through a Qualified Opportunity Fund.
Unlike traditional investments, a Qualified Opportunity Fund is fully funded by individual investors’ capital gains.
In other words, a Qualified Opportunity Fund cannot be funded by ordinary income.
Additionally, investing in Qualified Opportunity Zone Funds is typically restricted to accredited investors only.
As a reminder, accredited investors must meet one of the three qualifications below:
Before jumping into the specifics of how and where to invest in a Qualified Opportunity Fund, let’s take a dive into the tax benefits you stand to gain from Opportunity Zone investing.
There are three main capital gains tax benefits that result from Opportunity Zone investing:
As described in the earlier section, the tax benefits from Opportunity Zone investing are impressive.
However, there are more benefits and risks to consider before investing in Opportunity Zones.
Capital gains from any type of investment can be used to invest in Opportunity Zones. This means that the capital gains from real estate, traditional stocks, cryptocurrency, and more qualify for Opportunity Zone investments.
If the Opportunity Zones are successful in their purpose, the areas receiving investment will see considerable growth in the long term.
This means that investors have the chance to buy at a discounted rate before the community growth takes place. This, of course, often results in financial gains.
While there are numerous benefits to investing in Opportunity Zones, it is important to also analyze the risks associated with this type of investment.
First of all, there is no insurance of any kind in place to prevent investors from losing money. It's entirely possible to lose money through opportunity zone investing.
Additionally, there is a saying that making money buying and selling real estate comes down to three criteria: location, location, and location. This is a well accepted belief as investing in high growth and high potential cities often result in high returns for investors.
Typically, a good location to invest in is one with a low unemployment rate, high population growth, and high job growth over the short and long term.
Opportunity Zones were selected by the government because these low-income communities do not meet the typical investment requirements for real estate investors.
Unfortunately these selected low-income communities can possess less-qualified tenants.
Think about it, there are reasons the government needs to incentivize investors to take on this risk.
Remember, the goal with these Opportunity Zones is that the economic stimulus spurs economic growth within the region and revitalizes the area. If the investment fails to bring such growth, the outcome of the investment becomes less promising.
In 2019, CrowdStreet launched a Diversified Opportunity Zone Fund.
CrowdStreet is a relatively new commercial real estate investment platform that launched in 2014.
Since launch, the CrowdStreet Marketplace has closed 560 commercial real estate investment offerings (76 have been fully realized), raised over $2.6B in capital, and has distributed over $360M to the CrowdStreet Marketplace investors.
The Diversified Opportunity Zone Fund is executed through CrowdStreet’s subsidiary named CrowdStreet Advisors, LLC. For those familiar with CrowdStreet, this is the same group that creates tailored investment portfolios for CrowdStreet’s investors.
Investing in CrowdStreet’s Diversified Opportunity Zone Fund provides investors opportunities to gain exposure to Opportunity Zone investing. Additionally, investors have access to multiple projects around the United States that differ in project scope and risk.
This allows each investor to select projects tailored to their individual investment strategy.
The Vice President of Investments at CrowdStreet stated that many of the Opportunity Zones offered are outpacing the growth exhibited from major cities such as San Francisco and New York. This is an opportunity for investors to drive change in the world while benefiting from some of the greatest tax breaks offered in decades.
To learn more about the investment opportunities provided at CrowdStreet, check out our full CrowdStreet review here!
If you are familiar with real estate investing, it may sound like a lot of the benefits offered with Opportunity Zone investing match those offered with 1031 Exchanges.
However, there are some distinct differences to be aware of.
A 1031 Exchange is a tool that real estate investors use to defer capital gains taxes.
Simply put, this is an exchange of one real estate asset for another without having to pay capital gains taxes during the transfer.
Since a 1031 Exchange is a method of tax deferment, capital gains taxes on the sale of these real estate assets are still due at some point.
Additionally, there are three main rules that must be followed before reaping the benefits of a 1031 Exchange:
The IRS has laid out the entire process to certify and maintain a Qualified Opportunity Fund.
As a brief summary though, there are three main steps to creating an Opportunity Fund:
Since Opportunity Zones carry large tax implications, the IRS has created a frequently asked questions page on the official IRS website.
While this page does not answer every question that an investor can think of, the site contains the answers to 58 helpful questions.
In 2017 Congress passed a law that labeled certain distressed areas in the United States as Opportunity Zones. To help revive these areas and to drive economic growth, the government uses tax benefits to incentivize individuals to invest in the areas.
The end goal of this program is that these cities will experience a revitalization which leads to a decreased unemployment, decreased crime rates, and reductions in inequality.
Since the location of these Opportunity Zones do not typically spark the interest of investors, the government has provided substantial capital gains tax benefits for investing in Opportunity Zones.
Like any investment though, Opportunity Zone Investing comes with risks. Potentially the largest risk is the potential that the investments fail to ignite economic growth in the underlying city. Failure to accomplish such growth could result in a lack of property appreciation.
If you are ready to get started, check out the Opportunity Zone Fund offered by CrowdStreet here!