Across the United States, low-income Americans are struggling to find affordable housing. From coast to coast, millions of Americans are spending almost three-fourths of their take-home pay on monthly rent. And across the country, rents are continuing to go up; there does not appear to be an end to this trend in the near future.
Federal, state, and local governments are seen by many as solution-holders to the problem although it is unclear what the solutions should be. Initiatives, vouchers, tax credits, and homebuyer assistance programs are in place in various forms from state to state, but the affordable housing crisis persists.
There is an opportunity in the crisis, however, for investor home buyers to make a difference and bring relief through investing in Opportunity Zones, a program established by Congress in the Tax Cut and Jobs Act of 2017.
What Are Opportunity Zones?
An Opportunity Zone is a defined, delineated area with a low-income population. Individual states may designate up to 25% of low-income areas as Opportunity Zones.
Real estate investors that invest in these zones benefit from certain tax advantages, specifically the ability to reinvest capital gains income and enjoy capital gains tax deferment or even eventual dismissal of the tax. Investors are thus motivated to buy homes in low-income Opportunity Zones.
The idea is that long-term economic development (business growth, employment opportunities, the building of more housing) will be encouraged through investor funds flowing into these underprivileged communities.
How Do Opportunity Funds Work?
Opportunity Funds are investment vehicles set up specifically for investing in properties in Opportunity Zones. The properties must meet certain requirements to be eligible Opportunity Zone projects, including the requirement that they be significantly improved.
To use the Opportunity Fund vehicle, an investor must allocate more than 90% of the assets in the fund into the property located in the Opportunity Zone. An investor who puts his or her capital gains income into the Opportunity Fund must do so within 180 days.
The incentive for investors is that capital gains taxes are deferred or even waived altogether if the investment is held for at least ten years. Federal taxes may be deferred until December 31, 2026, and reduced by up to 15%.
By infusing funds (through the Opportunity Fund vehicle) into eligible projects located in specific low-income areas, investors have the potential of helping to bring stability, growth, and opportunity to a struggling area.
The more that investors put money into Opportunity Zone projects, the more those zones will be revitalized. Additionally, affordable housing options will be increased. A hoped-for by-product will be a sense of optimism and rejuvenation rekindled in the local community.
Anyone can invest in properties in any Opportunity Zone in the United States. House buyers who prefer to keep their investments close to home can visit Opportunity Zones Resources to see the location of their local Opportunity Zones.