For the first time in history, a vacant parcel of land on the Lower East Side of Manhattan has a common economic thread with low-income areas in Idaho. They are among the nearly 9,000 census tracts that have been designated Opportunity Zones by the federal government and are ripe for real estate investment.
The Opportunity Zone (OZ) investment is part of a new community development program offered through the Federal Tax Cuts and Job Acts of 2017, which encourages private investment in low-income urban and rural communities. They are a unique vehicle for smart investors who want to maximize their capital gains while investing that money altruistically to rebuild and reenergize communities. Think of the program as a free-market approach to spur economic and community development through long-term investment. It is a prime opportunity for real estate investors to rebuild entire communities while also benefiting from a federal tax break.
Earlier this year, governors from all 50 states were asked to identify low-income or low-performing areas in need of infrastructure investment. States could then nominate up to 25% of the areas meeting the criteria set forth by the federal government. New York, for example, identified 2,000 qualifying parcels across the state but could only recommend 514 tracts for OZ designation.
Under the OZ program, investors can defer taxes by taking capital gains from other investments and placing them into businesses or real estate assets in the OZ. By keeping their investment in the OZ for at least five years, investors can reduce their capital gains tax exposure by up to 10%; after seven years, 15%. If they keep their money in the OZ for at least a decade, they will avoid all capital gains taxes.
These added tax incentives will not only encourage investment in low-income areas, but will foster much-needed longer-term investment. It will breathe new life into neighborhoods that would never otherwise have benefited from real estate investment and present a real opportunity to give back to communities in need.
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