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In 2017, The United States congress made a revolutionary move through the Tax Cuts and Jobs Act. The act allows investors to defer capital gains taxes. This deference is possible if investors reinvest these capital gains into qualified funds.

Since then, investors have gone into low-income areas that they would not look into before the act’s passing. So, what are a qualified opportunity fund and zone, and why does the federal government offer preferential tax treatment?

Qualified Opportunity Zones

It’s normal to wonder why investments in these zones are exempt from taxation. Qualified opportunity zones are low-income or economically distressed communities. New investments in these areas get preferential tax treatment. However, investors must meet certain conditions.

An area gets Opportunity Zone status if the Secretary of the United States Treasury approves it. Then the Internal Revenue Service receives the go-ahead to declare regions as Opportunity Zones. As a result, qualified opportunity zones are available all over the 50 states in the U.S.

Qualified Opportunity Funds

These funds drive business and real estate investments into low-income areas. The government encourages investors to put money into these distressed areas by offering favorable capital gains tax treatment.

Therefore, investors reinvest capital gains into these funds to avoid paying taxes owed on their gains. With time, investors reduce and eliminate their tax bills.

How Zones and Funds Work

Firstly, qualified opportunity funds gather financial resources from affluent individuals in society. Afterward, they use the funds to purchase real estate in opportunity zones. The fund should develop the acquired property or make profits from the investment within 30 months.

The developments or improvements must be equal to the property’s value during purchase. For instance, if a fund buys property at $2 million, it must make improvements worth $2 million in 30 months.

The government aims to promote economic growth in low-income areas by providing such investment opportunities. In the process, these economically-distressed areas experience the following:

  • Increased job creation
  • Improved housing options
  • Enhanced business activities

The IRS keeps an updated list of opportunity zones. Therefore, funds select the best areas for investment among these zones.

The effectiveness of opportunity zones and funds is undisputed. According to statistics released in August 2020, these funds raised approximately $75 billion by the end of 2019. Private investments in these low-income areas showed the potential to reduce poverty by 11%. In addition, about one million Americans can become self-sufficient thanks to these investments.

Why Invest in Opportunity Zones and Funds?

After selling an asset, investors have large capital gains tax liabilities. These taxes prevent many individuals from selling businesses, real estate, and property. The easiest way to offload such an investment is to roll these gains into a QOF.

Doing so defers and eliminates investors’ capital gains tax liabilities. In addition, it provides the perfect opportunity to give back to the community. Moreover, opportunity zones have tremendous benefits. After-tax returns for investors are 40% to 50% higher than other investments in non-opportunity zones.


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