How to Invest in Opportunity Zones and Avoid Capital Gains

Putting money into Opportunity Zones is a good option if you want to make a lucrative investment. After all, these economically distressed communities come with preferential tax treatment.

Thanks to the Qualified Opportunity Zone Program, real estate investors have the perfect opportunity to invest in these zones. The program encourages investment in low-income areas, thus boosting economic growth.

An act (Tax Cuts and Jobs Act) passed in 2017 kickstarted the entire process. Thus, investors who put their money into opportunity zones reduce and avoid capital gains tax liability. As a result, opportunity zones real estate investment can earn you almost double returns after tax.

Two Best Ways to Invest in Opportunity Zones

The main way of investing in Opportunity Zones is through Opportunity Zone funds. The funds are also known as Qualified Opportunity Funds and are specifically set aside for investing in Qualified Opportunity Zones.

These funds bring together affluent individuals to contribute money into a large investment fund. The fund is then responsible for choosing investments that are lucrative for investors. If physical assets have more returns, the fund settles for those. However, investors can also own shares in the local businesses.

Although Opportunity Zone funds are not restricting, investors must contribute a certain minimum amount of money.

The next best way to invest in Opportunity Zones is via an Opportunity Zone Real Estate Investment Trust (REIT). This trust operates and owns investments in real estate. Therefore, individuals can also make real estate investments by purchasing stock in REIT (indirectly).

The Benefits of Opportunity Zone Investing

Avoiding existing capital gains is the most significant benefit of investing in Opportunity Zones. Moreover, investors get to avoid any future capital gains taxes. Here are more brilliant benefits of investing in Opportunity Zones:

• The investors’ capital gains after investing in Opportunity Funds reduce by 10% in five years. In addition, they reduce by a further 5% in seven years. To top it off, investors can defer capital gains for up to nine years.
• Investors who hold future capital gains on Opportunity Fund Investments in these funds for at least ten years get absolute tax exemption.   
• Investors should only reinvest capital gains. You can keep all other proceeds from asset sales.
• Sales made outside Qualified Opportunity Zones also qualify for capital gain deference.
• All capital gains, including precious metals, cryptocurrencies, and stocks, qualify for Opportunity Zone investment.
• Syndicators can create Opportunity Funds to invest in Qualified Opportunity Zone opportunities like residential rental properties.

Any form of investing should yield good profits. However, Opportunity Zones make the deal sweeter because investors can defer and leave capital gains from taxation. Moreover, the opportunity to make almost double the returns appeals to many investors.

So, investors should consider putting their capital gains into Qualified Opportunity Zone funds. Aside from tax exemption, such an investment allows diversification across many regions in the United States. The federal government also makes clear what areas fall under Opportunity Zones to attract potential investors.

In 2018, the government finalized approximately 8,700 Qualified Opportunity Zones (QOZs). These zones are across the 50 U.S states and are open to investment.