While many people were focused on how the 2017 tax bill affected how real estate and other assets would be taxed, few looked at another part of the bill: The Investing in Opportunity Act. This bipartisan act created opportunity zones and set aside opportunity funds that savvy investors can now take advantage of by investing in the right Wilmington, NC commercial real estate properties.
What Is the Purpose of Opportunity Zones?
The act was designed to provide incentives to revitalize communities that are considered economically distressed. This is considered anywhere where at least 40% of the people who inhabit the area make an income that is right at the poverty line or below it. However, instead of using taxpayer money like past projects have done, opportunity zones make use of private investor funds. Those who invest in a qualified zone receive benefits in the form of capital gains tax incentives. Experts have identified more than $6 trillion dollars of unrealized capital gains that could be invested in opportunity zones across the country. Even if only a small amount of that was invested, the program would still become the largest federal development initiative in history.
What Qualifies as an Opportunity Zone?
The Investing in Opportunity Act outlined a number of criteria used to determine which census tracts qualify as an opportunity zone. Since the act was passed, zones have been identified in all 50 states plus the District of Columbia and five U.S. territories. Once designated as an opportunity zone, the census tract will remain a zone for the next ten years. In the initial year of
the program, over 8,700 census tracts have been recognized as opportunity zones. A full list of current zones can be obtained from the Community Development Financial Institutions Fund website.
Why should you invest in an opportunity zone? First, because everything is privately funded through investors, there are fewer government restrictions and rules that must be followed. There is no limit on how many investors can invest in one opportunity zone because these zones do not operate under a tax credit program. This also means that there is no limit to how many opportunity funds can be created. These funds also do not require any U.S. Treasury approval and may self-certify. They are completely managed by the investors. There is no cap on how much can be invested into a zone. Investors can sink as much money into an opportunity zone as they want in order to stimulate economic growth.
There are some regulations that govern these zones and the opportunity funds, of course. They are more similar to Enterprise Zone Business rules and requirements than any other program, although there are some important differences that investors will want to research before investing. Those who are considering investing in opportunity zones will want to read the new Internal Revenue Code sections that govern the program, namely 1400Z-1 and 1400Z-2.
Opportunity funds can only be used for new building construction or existing building improvements, and there are a number of rules about how much money can be spent on buying existing buildings. In order to quality, the business must invest 90% or more of its holdings into qualified opportunity zones. The businesses they invest in must be located and conduct most of their work in an identified opportunity zone. Any property purchased must be located within an opportunity zone.
However, for following these rules, investors can take advantage of capital gain tax incentives right away, and these incentives do provide long-term benefits. Investors are able to defer paying any federal taxes on these capital gains until the end of 2026. Even when they do pay taxes on them, they may reduce the amount paid by 10% after five years and by 15% seven years after the funds were invested. If the investor holds the opportunity fund for at least 10 years, they receive a permanent exclusion from paying capital gains taxes on the amount invested.
A Closer Look at How Opportunity Funds Work
When you sell an asset—real estate, stocks, etc.—you normally pay taxes on the capital gained from that sale. However, if you were to invest the money received into an opportunity fund soon after the sale (within 180 days), you can take advantage of the tax incentives.
If you’re ready to benefit from these incentives, you’ll find that North Carolina has a number of opportunity zones. By selecting an investment property in Southeastern NC that falls into one of these zones, you’ll be able to both help revitalize a community and benefit from the tax incentives.