In 2017, the federal government created under the Tax Cuts and Jobs Act (the “Act”) what it called Opportunity Zones. Two short years later, it has become the largest investment tax incentive program in US tax history, potentially unlocking the $6.5 trillion in unrealized capital gains held by US investors, almost 50% of US G.D.P., for investment in these zones.

To put it simply, an Opportunity Zone is a community that has lagged economic development relative to the rest of the country that would benefit from new investment to drive economic growth. There are nearly 9,000 of these zones located in every US state, as well as the District of Columbia and five US territories.

What is Considered an Opportunity Zone

As part of the Act, Congress created Opportunity Zones with the specific purpose of incentivizing investment in areas that have lagged the rest of the country in economic development.  The Department of Treasury established a set of criteria by which areas, broken down by census track, would be considered for designation as an Opportunity Zone.  The Federal government asked state governors to submit a list of census tracks from consideration from which the IRS designated nearly 9,000 Opportunity Zones in all US states and territories.  These zones have the following metrics when compared with the national average:

• Twice the national poverty rate;
• Two-thirds of the median income;
• Half of the formal educational level;
• One-third greater unemployment measures.

Benefits of Investing in an Opportunity Zone

There are several benefits to investing in an Opportunity Zone. Investors, communities, and entrepreneurs alike all benefit from these newly-designated zones. Here is how each one of these groups benefits from the Opportunity Zones.

Investors

When an investor invests capital gains into an Opportunity Zone Business or Property (OZB or OZP) through a Qualified Opportunity Fund (QoF), they get a handsome increase in after-tax returns because capital gains on these investments are free from tax if held for the required holding period. They also get the ability to eliminate some of the tax which they already owe. There is a generously flexible structure at both the fund and investment level to give incentive to investors.

Communities

Opportunity Zones offer an exciting prospect for communities where economic development has lagged the US as a whole, by increasing the ability for these areas to attract new investment.  One interesting trend has been the formation of tech hubs in these areas that will attract more people looking for innovative places to work, especially when it comes to startups.

Entrepreneurs

Entrepreneurs will be delighted to hear that setting up an opportunity zone business is just as easy as in areas that are not Opportunity Zones. However, business in Opportunity Zones will benefit from this significant new source of investment capital. Finally, entrepreneurs can stand out from others in a crowded field by showing they are taking a unique step in running a business in an Opportunity Zone.

What’s Next For Opportunity Zones

The next wave of investment in Opportunity Zones looks like it will come from venture capital. Real estate investors were quick to realize the profit potential of Opportunity Zones.

A great example of this can be seen in Miami, which is one of the best cities for Opportunity Zones in the country right now. In the first quarter of 2019, sales of development sites in Opportunity Zones had skyrocketed 45% since the previous year. This is while sales are down all around the Opportunity Zones in Miami.

Although venture capitalists have not understood the financial opportunities in these zones previously, they are catching on. Thanks to new regulations, these areas are becoming more appealing to VCs. Venture capitalists will enjoy capitalizing on the new tax rules, which will be creating high demand.

Opportunity Zones are becoming better understood by many different types of investors as great financial opportunities. Conducting business in one of these zones can prove to be a financial boon to you if you decide to take advantage of the economic incentives and benefits of an Opportunity Zone.