Passed in December 2017, the Tax Cuts and Jobs Act of 2017 offers incentives for long-term investments in economically distressed areas also termed as Opportunity Zones (“OZ”). This legislation has the potential to be a win-win for communities as well as developers, municipalities, and investors.
For decades, the media has reported on the U.S. economy’s flawed system and flagrant divide. “More than 52 million Americans live in economically distressed communities wracked by poverty, poor education, and declining work opportunities.” [1]. Heated debates around subsidized housing, declining school districts, and minimum wage gaps have long been concentrated pockets of unbridled upset.
With a near breaking point on the horizon, this piece of bipartisan legislation unleashed last year can provide the expansion of long-term capital investments into low-income rural and urban communities.
By appealing to private investors and reducing their tax obligations, this unprecedented cash flow can then be earmarked for renewal and redemption of historically disenfranchised areas. Bundled as a Qualified Opportunity Fund, it stands as an investment vehicle – either a partnership or corporation – investing in an eligible property located within a designated “Opportunity Zone” and utilizing the investor’s prior gains for funding coverage [2].
According to the U.S. Department of the Treasury, reinvested capital gains would be deferred from taxation until exit from a Qualified Opportunity Fund or December 31, 2026, whichever comes first [3]. Additionally, any gains from Qualified Opportunity Fund investments held for at least ten years will be permanently excluded from any capital gains tax. After five years, 10 percent of capital gains can be excluded from taxes, and following seven years, 15 percent of gains will experience the same.
“A big slice of the estimated $6.1 trillion of paper profits on American balance sheets could go toward revitalizing depressed communities,” reports Steven Bertoni, in a 2018 spread in Forbes[4].
There’s No Place Like Home
Eliminating the poverty line and raising the quality of life for struggling U.S. communities cultivates an air of social impact. Tax break incentives transcend investor portfolios, too, signaling an altruistic approach to the American dream of life, liberty, and prosperity.
Altogether, the OZ Program aims to redefine:
- Economic exclusivity and diversity
- Infrastructure
- Housing supply
- Job opportunities
- Community activities and hubs
The states determine Opportunity Zones, and they’re approved by the government. However, governors can designate only 25% of their state’s low-income areas as Opportunity Zones [5].
Mid-Atlantic and Northeast qualified Opportunity Zone Communities include Essex County, NJ; Hudson County, NJ; Monmouth County, NJ; Bergen County, NJ; Middlesex County, NJ; Westchester County, NY; Fairfield County, CT; and the greater Philadelphia region.
Districts like Camden, NJ are already reliant on existing subsidies and grants, such as the Business Improvement Incentive program, to renovate its curb appeal, commercial offices, entertainment, and nightlife [6]. Still, others know larger moves can be much more palpable in the long run. In a press release, earlier this year, the State of New York has recommended 514 low-income census tracts for designation as Opportunity Zones [7].
The wider the pool of investors, the more wiggle room for exponential construction and revitalization for decades to come.
Circle Squared Alternative Investments has partnered with some of the regions above and witnessed economic growth in many areas.
To learn more about the latest real estate developments and possibilities, contact our team.
Investors should be aware of additional risks associated with alternative investments due to factors such as economic and political instability, regulatory requirements, increased volatility, illiquidity, higher management fees, lack of performance history, currency fluctuation, and differences in auditing and other financial standards and that these risks can be accentuated in alternative investments. Alternative investments may be suitable only to those who understand and are willing to assume the economic, legal and other risks involved.
The foregoing is not a complete list of the risks involved with alternative investments. You should thoroughly review all pertinent offering documents with respect to alternative investments with your financial, legal and tax advisors to determine whether the investment is suitable for you in light of your investment objectives and financial circumstances.
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Sources:
[1] (Ingraham, Washington Post, 2017)
[2] (Opportunity Zones FAQ, IRS)
[3] (New Jersey, Department of Community Affairs)
[4] (Bertoni, Forbes, 2018)
[5] (Lorin, Forbes, 2018)
[6] (Burd, Real Estate NJ, 2018)
[7] (Conwall, NY.Gov, 2018)