In the realm of impact investing, few people seem to see the benefits come to fruition, let alone experience the impact themselves. Given that part of the objective for such investments are to help those that are less fortunate, it’s no wonder that opportunity zones have become an attractive investment option for many looking to make an impact onto the community.
Now what exactly are opportunity zones? Through bipartisan effort of the Tax Cuts and Jobs Act of 2017, state governors and the Treasury Department deemed certain low-income communities as opportunity zones, in an attempt to spur investment and economic growth. With investment, these poverty-stricken areas can receive an increased standard of living through state-controlled measures such as the creation of local businesses, increased job wages, affordable housing units, and the like.
As of the most recent estimates, there seems to be about $6.1 trillion in unrealized capital gains from both households and corporations that qualify to have investments through opportunity zone funding (Opportunity Funds), and although the addressable market is likely much smaller, it still has the potential for tremendous impact.
There seems to be about $6.1 trillion in unrealized capital gains from both households and corporations that qualify to have investments through opportunity zone funding
Why Should Investors Care?
Now why exactly is an Opportunity Fund an attractive investment for wealthy individuals? Because it allows such investors to lower and eventually avoid any capital gains taxation on appreciating assets, all while channeling funds to low income neighborhoods that can be some of the best use of their investment.
For instance, assume I’m an investor, and I pour $100,000 of an appreciated asset into an Opportunity Fund. I would not have to pay any capital gains tax on that investment for the time that my investment is in the fund, and by holding that investment for 10 years, I can also be exempt from any capital gains taxes on the realized growth of the investment.
The EIG (Economic Innovation Group) looks at the growth of Opportunity Fund investments when compared to standard portfolios. Assuming both hold a constant rate of growth, the ongoing tax deferral rates result in an excess growth of up to 33% more than a standard portfolio investment.
It allows such investors to lower and eventually avoid any capital gains taxation on appreciating assets
It’s imperative to realize that although this paper focuses on the attractiveness of the investment through the lens of an investor, the most important objective is to facilitate impact. By directly channeling these funds into the most impoverished zones, this can directly combat income inequality and can benefit all parties alike.
This is rather new legislation, but the popularity of these investments is soaring. This could very well be the next new means of impact investing and is certainly promising a bright future for the impact concerned individuals can have on low-income communities.