The main aim of Opportunity Zones is to encourage long-term investments, especially in low-income rural and urban areas throughout the country, and to boost the economy. An Opportunity Zone is an economically distressed rural or urban community that has been identified by state, local, and federal qualifications.
Opportunity Zones offer a great investment opportunity for smart real estate investors. However, investors should bear in mind the risk profile of Opportunity Zone deals, which can be much higher in some targeted census tracts than the exchange. The key is to stay diversified while taking advantage of the capital gains tax relief that is available through the program. On the other hand, if investors remain diversified, there may not be enough funds flowing to these vehicles.
Only time will tell if this latest program will succeed in identifying the areas that will benefit most from the subsidy, as well as in overcoming the issues that have limited the effectiveness of similar initiatives. Although this concept sounds socially responsible, investors are only delaying or deferring their capital gains taxes.
This program could be good for investors in the sense that it lowers their capital gains taxes, but whether or not it’s going to be good for the people in those communities is still to be seen within the next decade. However, waiting may not be the best move for investors, since these assets are as cheap as they’re ever going to be.
Opportunity zones offer three benefits that make real estate attractive to professional investors: the chance of a great investment return, the promise of change in underserved areas, and the opportunity for a huge tax break.
There’s just one catch. In order to maximize the tax benefits, investors have a holding period of five, seven, or ten years, depending on the tax break — which means they can’t sell the real estate during that time period.
This restriction should cause more caution, but it hasn’t. Investors are not asking the most significant questions. They need to consider that the opportunity zone property market could be depressed when it comes time to sell. They also need to think about their investment strategy: whether to increase social benefit or maximize returns.
Unlike buying Apple or Google shares, which you are able to sell whenever you’d like or hold on to them forever, investing in an opportunity zone has some time hurdles that are set by the special tax treatment.
If the money stays invested for five years, investors get a 10 percent break on the gains, and after seven years, it raises to 15 percent. Also, the investment gains in the opportunity zone are tax free after 10 years.
Investors should also do some research on neighborhoods before they invest in an opportunity zone. Do they want to invest in a neighborhood that has already appreciated or in one that has a greater chance for appreciation?
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