Committing to a new investment vehicle comes with many questions, and you want to make sure you’re making the best decision for your financial future. Before fully committing to an Opportunity Zone investment, here are a few things you should know before you invest your money:
1. Compliance Requirements and Regulations
Whether you’re new to the finance world or are familiar with numerous types of investments, some investment literature can contain unfamiliar words or phrases. This type of information is essential to understand when it comes to Opportunity Zone compliance requirements and regulations.
Completely complying with all of the Opportunity Zone regulations will help guide you in the right direction of getting the most out of your investment. The location you invest in must be a Qualified Opportunity Zone. These include corporations or partnerships for tax reasons and can certify their qualifications.
Other important opportunity zone rules include:
- Qualified Opportunity Zones must have 90% of their assets in an Opportunity Zone location. Officials test this requirement routinely.
- The Qualified Opportunity Zone property must have significant improvements.
- A business in an Opportunity Zone must make at least half of their income from businesses within the Opportunity Zone.
Before diving straight into the investment opportunity, research and expand your knowledge on the compliance requirements to ensure it’s the right option for your investment portfolio.
2. Taxes and Qualified Opportunity Funds
When a person sells a property, stock or business, the money they gain is referred to as capital gains, and this asset money is taxed. Opportunity Zones provide tax breaks for this type of tax, making it one of the biggest perks of investing in a Qualified Opportunity Zone.
As previously explained, the percent of tax relief depends on how long your money stays in the Opportunity Fund. If you want to eliminate the capital gains tax, leave your money in the Opportunity Fund for the maximum amount of time to experience the extent of the major perk of this investment vehicle.
3. Impacts on the Community
Opportunity Zones can make a big difference for investors, but their main purpose is to improve the locations the Zones cover. The money in the Opportunity Funds can make a positive impact on the areas they service. If you’re investing in this opportunity, the process can be fulfilling knowing you’re making a difference in another community. To better understand an Opportunity Zone, learn about the community you’ll be investing in and how your contribution can impact the community.
Here are some of the needs for these communities and how your investment and help them grow:
- More jobs
- Increased wages
- Reduced crime rates
- Lowered inequality
- Enhanced sustainability
- Improved education
This investment vehicle can be an excellent economic growth tool for the area it’s contributing to. While investors are likely sold by the tax incentives that come along with Opportunity Zones, it helps that this investment enhances communities, so you know you can make a difference.
4. Opportunities to Invest in a New or Existing Qualified Opportunity Fund
Investors can simply find an Opportunity Fund they’re interested in, or they can set up and create their own Qualified Opportunity Fund. It’s important to understand that setting up your own Qualified Opportunity Fund is a big task. Investors will need to thoroughly understand the compliance regulations and rules and follow SEC guidelines when accepting capital from other investors.
Since creating your own Opportunity Fund is a significant undertaking, you can simply browse for a Qualified Opportunity Fund that already has a knowledgeable team. Allowing a third party to handle the Opportunity Fund allows you to take a more passive role in this investment and witness the impact of the Opportunity Zone without needing to be directly involved.
5. Investment Basics
Any investment vehicle has a thorough process and industry jargon that takes time to fully understand. If it’s your first time making an investment or your first time investing in an Opportunity Zone, make sure you research before investing. Knowing the basics of investing in these Opportunity Funds can help make a difference in your decision to allocate your capital gains funds.
When you’re looking into Opportunity Zones, look for properties that are compliant with Opportunity Zone regulations. Properties should be able to accept improvements equal to the value of the Opportunity Fund, so keep an eye out for properties that have more land surrounding them, deferred maintenance or new developments.
6. Locations for Opportunity Zones
To receive the benefits of an Opportunity Zone, the area and fund you’re invested in must be in a Qualified Opportunity Zone. Thousands of Opportunity Zones are scattered across the country. From inner cities to rural areas, you can find Opportunity Zones that pique your interest. If you want to check out different Opportunity Zones, search for them online.
7. Money Growth in the Investment Process
The characteristics of an Opportunity Zone help investors make their decision regarding the area they want their money to improve. Consider the factors that mean the most to you when looking at the metrics of an area and do your own research on various Opportunity Zone areas. This research will help you determine where growth is possible and how efficiently your money can impact an Opportunity Zone.
Look into the projected growth of an Opportunity Zone and how it can possibly impact a return. When looking into locations, consider the following:
- The population of the area
- Growth rate over the years
- Location demographics
- Jobs and businesses
- Average income
- Rental rates
- Amount of properties