Thanks to the strong performance of the stock market in recent years, you may be facing large capital gains on any investments you’re looking to sell. Investing in an Opportunity Zone Fund is one way you can help defer taxes and diversify your portfolio while also investing in economically depressed areas. Though this strategy is not without risks, explore how these funds work to determine if they may be an option for your portfolio.
How Opportunity Zone Funds Work
Opportunity zone funds were established in the 2017 Tax Cuts and Jobs Act to provide a tax benefit for private investors to put money into depressed areas. The fund’s investment is intended to spur job growth and further investment in a region. The U.S. Treasury Department certifies what areas qualify to be considered an opportunity zone. The fund must also invest at least 90% of funds into qualified opportunity zone properties, and substantially improve the properties they invest in within 30 months.
To defer or even reduce paying a capital gain on the sale of an investment, an investor must put funds from the sale into an Opportunity Zone Fund within 180 days. The fund then invests in an opportunity zone property. Through that investment, you can defer paying capital gains taxes on your profit until you sell your stake in the fund or until Dec. 31, 2026, whichever comes first.
The amount of taxes you’ll owe on your original capital gain may be reduced the longer you hold your investment in an Opportunity Zone Fund. For example, investors who hold the fund for five years will receive a 10% reduction on the taxes they own for an investment gain.
Considerations For Investors
Though these funds may sound appealing, there are some risks and considerations to keep in mind. Opportunity funds are currently only open to accredited investors, which are individuals earning at least $200,000 a year for the last two years ($300,000 for married couples) or a net worth exceeding $1 million, excluding your primary home. Many funds also carry hefty investment minimums of tens or even hundreds of thousands of dollars.
Don’t invest in an Opportunity Zone Fund simply to postpone capital gains on a big gain. Be sure you do your due diligence to ensure that the fund is making wise investments. There are more than 8,700 opportunity zones currently. Many of the funds have different investment plans, goals, and timelines. You’re potentially investing a large chunk of your portfolio into an area that investors have typically shunned in the past. Also, it’s unclear if the government will extend the program past 2026.
If you’re still interested in an Opportunity Zone Fund, I strongly recommend you speak with a financial advisor and tax professional before taking action.
Is An Opportunity Zone Fund For You?
If you’re considering investing in an Opportunity Zone Fund, it’s important to make sure that makes sense in the light of your overall financial plan. If you’re facing a potentially large capital gain tax bill, our team at HBA Wealth can walk you through your options. Contact us at (626) 529-8347 or email Ricky directly at firstname.lastname@example.org.
About Haydel, Biel & Associates
Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at email@example.com.
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