The prospect of investing in dilapidated inner-city neighborhoods or tumbleweed-ridden rural towns may not excite most investors. But a program embedded in the 2017 Tax Cuts and Jobs Act offers investors a tax incentive to do just that. As a result, a new type of fund that invests in low-income communities has popped up, and investors and institutions alike are starting to take notice. You’ve probably heard of opportunity zones. If you’re wealthy enough, you may have received a pitch to invest in an opportunity zone fund. These new investments sound appealing, but they’re not for everyone.
The new OZ funds pool money from multiple investors and invest in businesses and real estate development projects located in economically distressed communities that the federal government has designated as in need of investment. The more than 8,700 opportunity zones include parts of nearly every major American city, including Chicago and Los Angeles, as well as all of Puerto Rico and remote towns in Alaska. Investors who put money in OZ funds can defer and eventually reduce taxable capital gains, depending on how long they stay invested.
Triple tax break.
The tax benefits apply only to capital gains, but it’s a threefold incentive. First, you can defer federal capital gains tax on money you have earned from another investment by putting it into an OZ fund. Say you sell shares in a stock and realize a $100,000 capital gain (thou