One of the more interesting things to come out of the Tax Cuts and Jobs Act of 2017 is the Opportunity Zone tax incentive. There is a lot to like about this concept, but it’s a topic worth digging into a little deeper.

What Are Opportunity Zone Funds?

Opportunity Zones are pre-designated low-income neighborhoods throughout the country. The Opportunity Funds were created to take the money from investors and put it into these communities that need help. When an investor puts money into one of these Opportunity Funds, they benefit from certain tax benefits on the capital gains as long as they hold onto the investment for 10 or more years.

Rather than paying taxes on earnings like when stocks are sold, the taxes on the Opportunity Fund investment earnings are rolled back into the fund—essentially an interest-free loan from the government. Many of these Opportunity Zones are real estate investments, which allows for even more tax advantages.

Finding the Right Opportunity Fund

Investors will want to be careful when selecting an Opportunity Zone in which to invest. Some communities may have more long-term potential and some funds may do more for these low-income neighborhoods than others. Given that this system is still quite new, certain aspects are still being refined as time goes on. Certain rules and regulations are subject to change.

On paper, Opportunity Zone investment seems like a win-win scenario. It’s a chance for investors to “do well by doing good.” Low-income neighborhoods are getting much-needed money to improve living conditions and amenities while investors are getting great tax benefits from structured investment funds. In California, Governor Newsome is also proposing additional state-level tax breaks for Opportunity Funds aimed at low-income housing development and clean energy initiatives.

What Are the Drawbacks?

The biggest concern some investors have is the need to hold the investment for at least 10 years. Money can be pulled out sooner and there will be some percentage of tax benefits on the capital gains depending on when you cash out, but the most tax advantages will come when you stay in the fund for the long run. Also, there’s no certainty that the tax system won’t change again in the next 10 years.

From a real estate and mortgage perspective, some of these Opportunity Funds should be able to improve the real estate markets in certain lower-income areas throughout California and that will be good for the market as a whole. Only time will tell.

What do you think about the Opportunity Zone investment concept? I’d love to hear your thoughts. Email me at beau@tspmortgage.com or call Transparent Mortgage at (619) 701-3906 for all your mortgage and refinancing needs.

Beau Hodson

Beau Hodson

About the Author Since 2003, Beau has been a mortgage professional and is a leading mortgage broker and lender in San Diego. As Founder and Senior Mortgage Advisor at Transparent Mortgage, he is truly committed to serving the needs of his clients and raising industry standards for integrity and transparency.