A lot of people aren't familiar with just how great the new Opportunity Zones investments program can be for you.
The idea is pretty simple: invest in qualified Opportunity Zones, and any realized gains from those investments will be tax-free. And while it's a little hard to find out what things qualify as an "Opportunity Zone", we have put together an informative list of them to help make your decision a little easier!
In short, this opportunity might be coming just at the right time for you! Invest in qualified Opportunity Zone funds or businesses before December 31st, 2018, and take advantage of this incredible tax break - especially if you would otherwise owe capital gains on your investments.
The program is scheduled to expire after December 31st, 2026. Make sure you take advantage of it before then!
Each of the following investments may qualify for the Opportunity Zone tax break:
1. Equity Investment Funds
Defined: A capital fund organized to invest in qualified opportunity zone businesses or projects. There are two types of equity investment funds:
(i) private equity funds that have raised capital from unrelated investors and make qualifying investments that are within reasonable proximity to each other; and (ii) community development entities. A private equity fund otherwise qualifies if it makes investments only in qualified opportunity zone business or projects, and has raised capital from unrelated investors only after December 21, 2017.
These funds are an ideal option for investing in Opportunity Zones. If you are looking to invest in a private equity fund that then turns around and invests in Opportunity Zone projects, this is the perfect place to start.
2. Real Estate Investment Trusts (REITs)
Defined: Real estate investment trusts that invest primarily in qualified opportunity zone real property and related finance (e.g., financing of special purpose acquisition companies), such as land and real property development projects, but not debt or equity investments (e.g., loans) and their related interests, debt or equity securities (e.g., mortgages).
The best part about a REIT is that you can invest in an equity REIT and have the tax benefits! This is the main reason I invested with Bison Trust in my Opportunity Zone portfolio; they offer both an Equity REIT and a Bond REIT.
3. Community Development Entities (CDEs)
Defined: An entity organized to invest in qualified opportunity zone real property and related finance, such as financing of special purpose acquisition companies, but not debt or equity investments (e.g., loans) and their related interests, debt or equity securities (e.g., mortgages).
CDEs are a great option for Opportunity Zone investors as they allow you to invest directly in Opportunity Zone real estate - like land and buildings - that can provide a cash flow return. The investment is 100% tax-free and will give you a chance to build wealth over time!
4. Any Qualified Business or Project Which Reaches $315,000 in Investment within 10 Years
Qualified businesses and projects include those which reflect the administration's long-term economic development strategy, including real estate development, infrastructure projects, energy production facilities, telecommunications projects, manufacturing facilities, retail facilities, technology hubs (e.g., biotechnology), educational facilities (including charter schools), health care facilities and tourism facilities.
This is perhaps the most general of the investment options, as it doesn't require any special type of entity - you can invest in anything that's a qualified business or project. This is one of the best options for smaller investors who don't have much capital to invest and want to take advantage of the tax benefits. It just takes a little longer to realize your gains from this type of investment.
5. Purchasing Qualified Business or Project Bonds
Defined: Bonds issued only to finance certain specific qualified opportunity zone investments businesses or projects that are not secured by real estate. Special rules for determining the original issue discount and the market discount apply to bonds.
The term "qualified business or project" includes excepts projects, such as real estate development, private equity funds, manufacturing facilities, and energy production facilities. These bonds are another great way to invest in Opportunity Zones while also taking advantage of tax breaks! The only problem with these is that you'll have to wait until the bonds mature before you realize any gains from these investments.
6. Funding Qualified Businesses or Projects by Investing in Equity or Debt Securities
Defined: Securities issued by qualified opportunity zone investments businesses or projects which are not backed by real estate. To qualify, securities issued must be purchased from an unrelated party on a secondary market (e.g., stock exchange), or from the issuer of the security. In either case, 50 percent of the proceeds raised must be invested in qualified opportunity zone property within one year after acquisition.
These investments happen when you invest directly in a company that's established as a Qualified Business or Project and then re-invest 50% of your earnings back into more Opportunity Zone investment opportunities within a year. Since you can invest in a private equity fund, REIT, and CDE all at once, this is a great option if you're looking to take advantage of all three tax benefits right away!
7. Acquiring Qualified Opportunity Zone Properties for Free or Discounted Prices
Defined: Property was taken in a qualified opportunity zone transaction (e.g., foreclosure sale) that meets the requirements of section 1400N(e).
This category includes property that was originally paid for with Qualified Opportunity Zone Incentives (QOZI) as well as property that qualifies under other sections of the statute including 1445, 1446, and 1538. In order to be a QOZI, the organization must be a "qualified opportunity zone business or project investment entity".
This is where you can invest in property that was purchased by investors using QOZI funds. Many of these properties are distressed (foreclosures) so if you have the capital to buy a property you could benefit from the tax-free investment and then turn around and sell it when it's back on its feet!
Note: The QOZI rules are complex and there's no guarantee that these investment opportunities will be available in every market, but your broker should be able to help you find properties that qualify for this type of Opportunity Zone investing.
8. Purchasing Qualified Opportunity Zone Properties From a Personal or Family Trust
Defined: Property was taken in a qualified opportunity zone transaction (e.g., foreclosure sale) that meets the requirements of section 1400N(e)(5).
This category includes property that was originally paid for with QOZI funds through a family trust and then transferred to the investor as an outright gift. The QOZI rules are complex and there's no guarantee that these investment opportunities will be available in every market, but your broker should be able to help you find properties that qualify for this type of Opportunity Zone investing.
9. Qualified Opportunity Zone Property
Defined: Qualified opportunity zone property is generally any real property, including land, buildings, and personal property, that the qualified opportunity zone business or project develops or acquires. These are also known as Qualified Opportunity Zone Assets (QOZA) and are specifically defined as being "real estate owned or leased by the qualified opportunity zone business or project.
The term "qualified opportunity zone business or project" includes excepts projects, such as real estate development, private equity funds, manufacturing facilities, and energy production facilities.
This is a broad category that includes investments in both real estate and business. This is the category that most people will invest in when they think of Opportunity Zone investing. This type of investment is great for long-term investors because if you hold onto the asset for 10 years you can completely avoid taxes on any gains from the sale of the property!
10. Investing In Qualified Opportunity Zone Businesses Or Projects Owned By A Qualified Opportunity Fund (QOF)
Defined: Qualified opportunity zone business or project owned by a qualified opportunity fund. The property interests must be held indirectly through one or more partnerships, S corporations, or other entities treated as pass-through entities for federal income tax purposes.
A QOF is a limited partnership, S corporation, or other entity treated as a partnership for federal income tax purposes that is qualified to take advantage of the Tax-Free Opportunity Zone rules and that meets additional special requirements related to the activities of the business or project.
The key here is that you're looking at investing in a business rather than an actual property. This means you could turn around and sell your investment down the line when it's doing well without giving up any of your gains! You can invest in these types of Qualified Opportunity Zone Asset funds by making investments through a brokerage account, mutual fund, or any other type of investment account.
11. Investing In A Business That Meets A Social Or Economic Test
Defined: Investment in a qualified opportunity zone business or project that meets an applicable social or economic test.
Social and economic tests are defined by section 1400O. They include charitable guarantees, benefits to low-income individuals, environmental benefits, and property located in certain regions with high unemployment or poverty rates.
This is the only type of investment that you'd want to invest in if you're going to do this as a long-term investment. If your intention is to hold onto the property 10 years from now, this is the better option because all of your appreciation would be tax-free! All you need is enough cash in the bank to get things started.
Qualifying For The Opportunity Zone Tax Deduction
Tax savings are based on income and property type. You can typically qualify for a reduced tax rate by investing in Qualified Opportunity Zone Properties or businesses or projects where the owner qualifies for a lower tax bracket. So even though both QOZIs and QOFs are considered "qualified", they're treated very differently.
For more information, you can visit Real Estate Calculators.
