Opportunity Zones, while not commonly known to the public, can serve as excellent investments to the communities they exist within, as well as to entrepreneurs looking for a long-term tax-savings strategy.
Many geographical areas with low-income communities are designated as Opportunity Zones, places where certain tax incentives may be provided to those who invest in them and remain for specified periods of time. There are over 8,764 across America.
Why Should I Invest in an Opportunity Zone?
Simply put, the tax benefits. In an effort to bring in funding to improve the economic health of communities that need it, investments that qualify for Opportunity Zone benefits have some enticing features to look forward to.
Deferral of Recently Realized Capital Gains
- Recently realized capital gains may be reinvested into a qualified Opportunity Zone project. The deferral will remain until the earlier of one’s exit from their Opportunity Zone investment, or December 31, 2026
Step-Up Cost Basis for Capital Gains Invested
- Investing recent capital gains into an Opportunity Zone has another perk: the basis of those gains is increased by 10% if the investment in the Zone is held for at least 5 years. If it is held for at least 7 years, an additional 5% step-up is granted, for a total potential step-up of 15% in your cost basis
Permanent Exclusion of Capital Gains After 10 Years
- For an investment held in an Opportunity Zone for at least 10 years, there is no taxable income associated with capital gains from the sale or exchange of it. Essentially, if you grow a successful business in one of these places and hold it there long enough, you might not pay a dime on the profit of its sale
How It Works
A Qualified Opportunity Zone Fund (QOF) is the investment vehicle that must first be set up, either as a partnership or corporation, to then provide capital for property and business inside the Qualified Opportunity Zone. From there, any type of equity investment can be made into your project.
The majority of activity (50%+) of the Qualified Opportunity Zone Business (QOZB) must come from the Opportunity Zone it serves in order to uphold this special status. Put another way, a substantial amount of business can be performed outside of the Opportunity Zone while still maintaining its distinction. As long as your business is primarily serving the community of the Zone, you can operate elsewhere at the same time.
To be clear, this majority rule of 50% activity applies to both revenue earned and wages paid.
What if you already have a functioning business and want the benefits of a QOZB? Just move it into one. The rules behind these designations allow for a business to relocate into an Opportunity Zone and receive the same benefits, assuming it adheres to the rules.
One last point, a QOZB is not required to own property in the Zone it’s operating in. This is a tremendous relief of capital burden that other programs tend to not be as flexible on.
If you or a fellow entrepreneur is thinking about starting a business, consider doing so in an Opportunity Zone!