Article provided by: Galena Equity Partners
Opportunity zone funds
Opportunity zones are typically low-income communities that investors are wont to overlook. They are designated as such so that investors that effect in these distressed regions can enjoy mouth-watering capital gains tax incentives. The government hopes that these incentives would stimulate private participation in the development of these areas. Opportunity zone funds or simply opportunity funds are the means through which investors can pour their money into these zones.
How are opportunity zones created?
Since the passing of the law backing them, opportunity zones have been created in all fifty states and five American possessions. The federal and state governments are in charge of creating opportunity zones, but the zones have to go through a nomination and designation process. Before any zone can be designated as an opportunity zone, it must meet the criteria for low-income communities as defined by the United States Internal Revenue Code Section 45D(e).
Why should I consider investing in opportunity zone funds?
The ultimate purpose of opportunity zone funds is to identify the areas that are most in need and provide incentives for the private sector to invest in the development of these areas. The incentive investors stand to gain include:
- Paying zero federal taxes on the returns on their investment as long as they can hold the opportunity fund for at least ten years
- Deferring federal taxes on previous capital gains tax until 2027
Asides allowing you to defer paying taxes on previous gains, opportunity funds can also significantly lessen your tax burden.
- If you hold the fund investment for more than five years, you’ll be eligible for a 10% reduction in the deferred gains.
- If you hold it for seven years, you’ll be eligible for a 15% reduction.
- If you hold if for more than ten years, you wouldn’t be paying any tax on the fund’s appreciation after selling.
We understand that these terms could be slightly confusing, but we hope the example below can help you understand the concept of opportunity fund for real estate better:
If a long term property sale results in a profit of $1,000,000, you would ordinarily have to pay $238,000 (23.8%) as federal capital gain taxes. However, you can choose to invest the total profit into an opportunity fund. That way, you won’t have to pay any tax in the short term.
Assuming you’re guaranteed an annual return of 10%, your investment would be worth $2,000,000 after ten years. Because you invested in an opportunity fund, you won’t have to pay any tax on the accrued $1,000,000. The only tax you’ll be paying is the deferred tax, and you’ll only have to pay 90% of $238,000 ($214,200).
Contact the leading opportunity zone funds investment group
If you want to make the most out of your opportunity zone funds, it would be best to get in touch with Galena Equity Partners. Our opportunity fund arm is dedicated to making a purposeful impact, and you can trust us to manage your investment in the best way possible. Join us today to gain a first-hand experience of what it means to have a good investment.