Heard the buzz about opportunity zone funds? Here’s the skinny

Personal Finance


So, when all is said and done in this illustration, you could end up paying taxes on just $85,000 of gains instead of the full $200,000 that you would without the tax break.

The recent federal guidance also clarified that if short-term gains are reinvested into a fund, they will remain characterized as such and not be considered long-term gains after being deferred or reduced.

Short-term gains, which are gains generated from assets held for one year or less, are taxed as ordinary income subject to tax rates up to 37 percent, depending on a person’s overall income.

The tax rate on long-term gains — those on assets held for more than one year — ranges from zero to 20 percent, depending on your income. Also, taxpayers with adjusted gross income of $200,000 or more ($250,000 for married couples filing a joint return) pay an extra 3.8 percent on those gains, for a total of 23 percent.

While the new opportunity zone funds seem poised to attract investors looking to both minimize their taxes and do it in a way that benefits struggling communities, there are skeptics.

“Some of these zones are in gentrifying areas that would have attracted investments anyway,” said Steve Rosenthal, a senior fellow at the Urban Brookings Tax Policy Center. “You’ll probably see projects that were already going to happen being restructured to use these funds.”

He also questions whether the government will be able to accurately gauge whether the investments are making a difference in the opportunity zones.

“I think the program is well-intentioned and not intended as a giveaway to rich guys or anything like that,” Rosenthal said. “But it will be hard to measure whether it’s working or not.”

Past federal tax incentives to spur investment in distressed areas have produced mixed results for the communities they were intended to benefit. However, Economic Innovation Group’s Lettieri pointed out that opportunity zone investments are designed differently: The tax benefit is not capped as it has been in past efforts, the initiative is more widespread and investors only get the full tax benefit if they’re in for the long haul.

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“Investors will have to commit through a long period and then have gains to reach the end of the tax rainbow,” Lettieri said.

Of course, there’s no guarantee that investors will come out ahead, which means it will be important to evaluate the specific projects that the fund’s assets would go toward, and weigh the potential risks with the hoped-for benefits.

Already, a variety of investors — from real estate developers to venture capitalists and financial institutions — are in various stages of creating these funds and raising money for them.

PNC Bank, for instance, has a fund that already is investing in qualified projects spanning manufacturing, housing and business incubators in different opportunity zones, according to a bank spokesperson. However, it is composed of gains owned by the bank and not open to the public. Goldman Sachs also has been raising money for such funds, according to published reports.

Industry watchers expect that more financial institutions will create funds and potentially make them available to the public. Financial advisors with interested clients also are paying attention to the development of these new funds.

“The reality is this is one of the best tax things that has passed in the last decade, if not our lifetime,” said certified financial planner Matt Chancey, an investment advisor in Orlando, Florida. He has client money ready to invest when the right opportunity presents itself.

“We’ve got a substantial amount of money on the sidelines, and we’re just waiting for more guidance because we haven’t eclipsed the 180-day [reinvestment] window,” Chancey said. “It feels prudent to wait until Treasury tightens up the regulations and more projects come on line.”

Meanwhile, Lettieri predicts that a year from now, tens of billions of dollars will be invested in these funds. While that’s just a fraction of the trillions in unrealized gains out there, it’s enough to start making a difference in communities, he said.



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