What are Opportunity Zones?
An Opportunity Zone is an economically-distressed community where investors can earn preferential tax treatment for pouring capital into it. Post-recession, some communities simply did not recover and these particular communities have become opportunity zones. These zones are approved by the federal government and remain opportunity zones 10 years after they have been designated as so. During this time, investors have the option to defer taxes on their capital gains as long as they invest those gains into an opportunity zone fund. These funds must put at
least 90% of the pooled capital toward developing these opportunity zones.
This has intrigued interest from commercial real estate clients because of the increased investment opportunities and the guarantee that if the investment is in place for 10 years, the appreciation on the opportunity zone investment is excluded from future taxation.
When Should You Invest in an Opportunity Zone?
Investors are attracted to new opportunity zone investments because of the tax deferment and exclusion factor. Although, the tax reduction benefits are dependent on how long the investment is kept. If the opportunity zone fund is maintained for 5 years, there is a 10% exclusion for this deferred gain and in 7 years 10% turns into 15%.
An investor will become eligible for an increase in the basis of the fund’s investment equal to its fair market value if the investment is maintained for 10 years or more on the day that the fund investment is either exchanged or sold. This is why it is important for investors to understand that the sooner they choose to invest in opportunity zones, the faster this investment begins generating ROI.
How Should You Invest in Opportunity Zones?
When investing in an opportunity zone, you should consider expanding upon your traditional ideas and putting your capital gains to work. You may not initially think that diversifying your portfolio with assets that may yield a lower potential return is a wise choice, but opportunity zones will mix things up. The tax benefits you receive will let you as an investor take a lower pre-tax return on this diverse asset and you will end up achieving a higher post-tax return. This can help promote new projects in these areas that need the work, attention and expansion.
What is a TIF District?
A TIF (Tax Increment Financing) district is an area within a city that, after much careful study by the city and expert consultants, is found to be “blighted” and without hope of attracting private investment without some governmental intervention. These are important criteria that must be met prior to the creation of a TIF and they ensure that the funds generated from a TIF are used in areas truly in need of redevelopment.
Once a part of town meets the criteria, how does it work?
A TIF district essentially reallocates funds from property taxes to encourage investment within the district. Any increased tax revenues collected as a result of an increase in property values then go into the TIF fund and can be used by the city for a wide range of purposes within the TIF to promote redevelopment.
What are the benefits of TIF funds?
• TIFs create short- and long-term benefits for communities:
• No tax increases attributed directly to development of infrastructure
• Improvements to blighted areas of the City
• Increased property values
• Private investment and development
• New jobs
• Job retention
• Job training programs
• Stronger, broader tax base
• Stronger economic base
• Locally controlled development
• Incremental revenue is reinvested in the TIF district
• Stimulates investment outside TIF district boundaries