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According to the 2017 Distressed Communities Index by the Economic Innovation Group, one in six Americans, approximately 17 percent of the population, live in economically-distressed communities, and the average state has 15.2 percent of its population living in these struggling areas.
The new Opportunity Zone (OZ) tax incentive was created as part of the 2017 Tax Cuts and Jobs Act to encourage investment in low- to moderate-income communities across the country through tax benefits, such as deferring tax on capital gains by making an investment in any of the designated zones. So far, 8,761 communities covering all 50 states, including the five U.S. territories, have been designated as opportunity zones, and they will keep this status for 10 years.
The Investing in Opportunity Act has the potential to have a direct social and economic impact upon underserved communities, benefiting investors, communities and taxpayers alike. It is predicted to be a pivotal catalyst for economic recovery, business development and affordable housing, which could help countless individuals achieve financial stability and economic growth for themselves and future generations.
Real estate investors and high-net worth individuals are seeking to take advantage of opportunity zones to use their capital, which otherwise would be sitting on the table, to help their surrounding communities. Thus, industry professionals, especially those in the commercial space, should be informed about the benefits and potential pitfalls of this new investment trend.
Benefits
- A Win-Win Situation – Aside from receiving a tax break on their capital gains, investors have an opportunity to make an impact in their local communities.
- Low-Cost and Low-Risk – This new legislation is a low-cost and low-risk opportunity for taxpayers. Investors bear the brunt of the risk for their originally deferred capital gains, although they do receive a tax reduction for long-term holdings.
- Direct Impact for Economically-Distressed Communities – Low-income and economically-distressed cities and towns—which include over 52 million American citizens—are benefited by having funds funneled directly into programs that can help with job growth, affordable housing, entrepreneurship, and more.
- Long-Term Investment – The Act encourages long-term investment by offering a reduction in capital gains taxes owned on their original investments after holding them for five to seven years. In addition, if investors have qualified investments held for more than 10 years, those assets will be exempted from further capital gains recognition over what was deferred originally.
Risks
Opportunity zones are anticipated to be influential in putting capital into areas that need it most, which otherwise would have been left on the table; however, a concerted effort will have to be made to make sure that rural areas are not overlooked for investment in fear of small returns compared to more populated city centers in states such as New York and California.
Revitalizing our distressed communities will help bring more jobs to citizens—especially in the development of hospitality businesses—reduce crime rates, and provide resources and opportunities for more Americans to reach their full potential and improve their quality of life.