By now, the majority of mutual fund portfolio managers and investor-class financial planners are aware of opportunity zone investing. It’s a relatively new investment vehicle created by the Tax Cuts and Jobs Act of 2017 and primarily designed to foster economic redevelopment in impoverished areas across approximately 8,700 U.S. census tracts. While the benefits of this investment vehicle might be the greatest financial planning tax tool ever, there are reasons why opportunity zone investing has been slow to catch on – and sometimes difficult to promote beyond traditional real estate and energy plays that rely on raising capital funds to invest.
Before we get to that, let’s review several of the unique benefits to investing in opportunity zones. First and foremost, it offers the best arbitrage in the market, combining competitive rates of return with early cash flow and traditional oil and gas tax benefits. Why is this the key value proposition? Because optimal investments are not judged solely on what you can earn, but also what you can keep. Here’s how it works:
These types of investments are constructed through filings with the IRS (Form 8896) to develop a Qualified Opportunity Fund (QOF), a vehicle organized to invest at least 90 percent of the capital raised in a designated opportunity zone property tract. If investors hold their stake for 10 years, they owe no capital gains tax on the investment until Dec. 31, 2026, potentially creating double-digit increases on annualized returns.
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