Making the world a better place while making a lot of money — if that sounds like a good idea to you, then you should consider investing in Qualified Opportunity Zones (QOZs).
QOZs are struggling geographic areas where investment can be expected to yield a substantial return. Congress established them with the 2017 Tax Cuts and Jobs Act to spur economic activity in low-income communities. Every state in the nation has multiple such zones, which can be both urban and rural.
Investing in these locations incurs many benefits. While the possibility of dividends from earnings is the most obvious, QOZs can also generate tax breaks for savvy investors. For me, however, the biggest advantage comes from witnessing a distressed community return to life and start to thrive.
While these opportunities are only available to accredited investors, once that threshold has been reached, getting involved is easier than many think.
Identify the right Qualified Opportunity Zone for you
Most investors only finance projects in industries and locations they are already familiar with, since this helps them gauge profitability accurately and reduces the possibility of costly misjudgements. Investing in QOZs should be no different.
The first place to look for these ventures, then, is in the community or region where you live. Places where you have spent a substantial amount of time can also offer viable opportunities. To start your search, consider visiting the US Department of Housing and Urban Development’s interactive map, which shows all registered QOZs.
The second thing to consider is your own expertise. What areas do you specialize in? Already having substantial knowledge in a given industry permits you to scrutinize existing investment opportunities within those zones quickly. The Economic Innovation Group, a public-policy organization dedicated to fostering economic growth in the US, has compiled its own interactive map showing not only current funds and investments, but also state and local government initiatives that support them.
Should you invest in a zone or a fund?
Some QOZs remain underutilized, so ample opportunities still exist for their development. For investors who are interested in spearheading their own projects, these geographic areas deserve the most consideration. The Tax Cuts and Jobs Act outlines who is eligible and what the reporting requirements are.
In many QOZs, Qualified Opportunity Funds (QOFs) have already been established to begin tapping a given community’s economic potential. Other QOFs span multiple QOZs. This means projects are already in place — such as student housing in a college town, for instance.
Where QOFs exist, the work has already been done for investors, who need only supply capital to receive possible dividends and tax benefits in return. For instance, rolling capital gains into QOFs within 180 days temporarily defers taxes and enables depreciation deductions to offset other income or capital gains taxes. Capital gains from investments in QOFs that last 10 years or longer are permanently exempt from taxes.
How to invest in a Qualified Opportunity Fund
When it comes to investing in QOFs, research is vital, just like for any other investment.
Toward that end, look at the people behind the projects — not only the developers, but also their advisors and lawyers. Since relationships power these teams, weigh these individuals’ experience as well as the quality of their interactions with each other. Effective business teams embrace open communication and honesty. They value dissenting voices and are strong enough to encompass conflict.
Relationships also determine the amount of cooperation that can be anticipated from state and local officials. As an investor, look for teams with a track record of obtaining approval from the relevant decision-making bodies. The leaders of the best QOFs work cooperatively with state and local governments, striking win-win deals that mitigate the fund’s expenses. For instance, the fund might agree to build a bridge or road if the city runs power lines out to a new factory or other building.
Smart opportunities with large possible margins
QOZs constitute an innovative approach to revitalizing distressed regions across America.
In my experience, some investors still worry about putting their money into low-income locales, even after learning about the many advantages of QOZs and QOFs. This is a mistake. QOZs and QOFs actually offer more growth potential, thereby promising a better return on investment than new enterprises outside of them.
In essence, QOZs and QOFs enable businesses to grow in a win/win manner. In the process, they transform whole communities.
DISCLAIMER: MCKNews, its editor, and its associated parties are not financial advisors and hold no regulatory licenses. Nothing contained herein should be construed as investment advice.
