Opportunity Zones Arent Just a Real Estate Tool
OZs
It’s been several years since we published content on Opportunity Zones. As part of our year-end financial strategy series, we thought it time to reintroduce the tool.

Opportunity Zones (OZs) were created as part of the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities in the United States. There are approximately 8,000 such zones approved.

Here are some key points you should consider when evaluating whether Opportunity Zone investing is suitable for your situation:

Understanding Opportunity Zones:
Opportunity Zones are designated census tracts that meet certain income criteria. These areas are typically economically distressed. Investors can defer capital gains tax by reinvesting the gains into Qualified Opportunity Zone Funds (QOFs).

Eligible Investments:
Investors can deploy capital gains into OZs through various investment vehicles, such as real estate projects or businesses located within designated zones. Eligible investments include the development or improvement of properties, as well as investments in qualified businesses. Most OZ activity revolves around real estate, but the reality is the tool is not limited to real estate at all.

Qualified Opportunity Funds (QOFs):
To take advantage of the tax benefits, investors must invest in a QOF, which is an investment vehicle that is organized as a corporation or partnership for the purpose of investing in OZ property. QOFs must hold at least 90% of their assets in OZ property.

Tax Benefits:
Capital gains invested in a QOF can be deferred until the earlier of the sale of the investment or December 31, 2026. If the investment is held for at least 5 years, there’s a 10% reduction in the deferred capital gains tax. If held for at least 7 years, the reduction increases to 15%. If held for 10 years or more, any appreciation on the QOF investment is tax-free. See comments below on the expiration date for OZs.

Risks and Due Diligence:
Opportunity Zone investments, like any other, come with risks. Investors should conduct thorough due diligence to understand the specific risks associated with the chosen investment. Real estate development projects, in particular, can be subject to market fluctuations and regulatory challenges. Just like 1031 Exchanges, the strategy should first focus on re-investing in solid assets and secondarily benefit from the tax deferral. As you noticed in the criteria, there is an expiration date of 2026 for OZs. There is potential it will get renewed, but this renewal has not happened under this Congress over the last two years, so the odds of renewal are dwindling. All that’s to say, there are still benefits that cab be realized, but you need to navigate this with an expert.

Exit Strategy:
Investors should have a clear exit strategy. The longer the investment is held, the greater the potential tax benefits. However, it’s crucial to plan for a smooth exit strategy that maximizes returns.

Consultation with Professionals:
Due to the complexity of tax regulations and investment strategies, investors should seek advice from tax professionals, legal experts, and financial advisors to ensure compliance and maximize benefits. The OZ Pros team is as good as we have found in this area and we are happy to put you in touch with them. (The easiest way to reach out is to enter your info with the word “OZ” on the AngelMD website chat.) They not only do advisory work, they work with Qualified Funds so you don’t have to deal with all the infrastructure of deploying capital.
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