Opportunity zones are lucrative areas for CEOs to invest in development projects such as real estate funds.
In the last six months of 2021, Novogradac reported that investors put in $6.88 Bn in the 1,342 qualified opportunity funds (QOFs) the firm follows. This represents a substantial injection into the US economy and the standard of living for thousands of people.
Opportunity Zones, enacted through the Tax Cuts and Jobs Act 2017, encourage investors to direct their funds into development projects such as a real estate fund. The opportunity fund rides on incentives such as reduced or eliminated tax liability on capital gains directed to low-income regions. OZs present a lucrative strategy for organization heads, as they have many potential benefits.
Why OZs are Appealing to CEOs
The Tax Benefits
Every CEO’s primary objective is to optimize the organization’s returns and stimulate wealth gains for the company shareholders. Qualified Opportunity Zones offer these benefits for entities:
Deferred Tax
Investors who reinvest their capital gains into a qualified opportunity fund can defer their capital gains taxes until 2026 or before the fund is sold or exchanged. To qualify, they must do this within 180 days of achieving the gain.
The Subsequent Reduction in Capital Gains Tax
Suppose you put your capital gains into an opportunity fund on or before December 31, 2021, and hold this investment for five years. In that case, you are eligible for a 10% reduction in the original deferred tax liability. If you hold it for seven years or longer, you are eligible for a 15% reduction. If you hold it for longer than ten years, you are eligible for a total exemption from capital gains tax liability.
Social and Environmental impact
The Sustainable Development Goals (SDGs) have led industry and organization leaders to consider sustainability beyond profit. The welfare of the people and the world are paramount, and CEOs are driving business strategies towards social and environmental impact.
The Opportunity funds stand upon the requirement that investors direct their resources towards Qualified Opportunity Zones.
What Makes a Qualified Opportunity Zone?
Opportunity Zones are designated regions identified as low-income or marginalized. They are characterized by lower than national average household income levels, higher than national average poverty levels, and increased negative effects such as crime. There are currently about 8700 OZs across every state in the US and its territories.
Investing in these regions gives you the room to enact positive impacts such as job creation, better infrastructure, and economic development.
The Room to Diversify your Investment Portfolio
The marginalized communities within opportunity zones need all-around support in different sectors. These regions have limited access to affordable housing, education, healthcare, and more.
The opportunities for high returns while investing in something you care about are high. You can transfer the organization's values into the community, cementing your brand while changing people's lives. Combining such projects builds the organization's investment portfolio, increasing returns and spreading the risk.
Though many economic challenges mar opportunity zones, they present a unique growth avenue for investors. The capital gains incentive potentially allows you to make higher returns than in a traditional zone. It also spurs development in needy communities, bridging the economic gap between them and more affluent neighborhoods in the US.
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