The popularity of socially responsible investing is on the rise. Whether the focus is on supporting sustainability, promoting human rights, or minimizing environmental impacts, a growing number of investors are seeking out ways to achieve positive change while still pursuing financial returns.
Opportunity investing, which was created by the 2017 Tax Cuts and Jobs Act (TCJA), is a form of socially responsible investing that focuses on revitalizing low-income communities across the US. It provides for the establishment of Qualified Opportunity Zones (QOZs), which are designated by the US Treasury Department after being nominated by state governors. The TCJA encourages investment in QOZs by extending significant tax benefits to investors who participate in opportunity investing.
“Opportunity investing is the hidden gem in the 2017 Tax Cuts and Jobs Act,” says Dr. Jim White, Chairman and CEO of Post Harvest Technologies, Inc. “The program it establishes represents an innovative approach to spurring long-term private sector investments in low-income rural and urban communities nationwide. It provides our nation with a new path to bolstering and revitalizing distressed businesses and communities.”
Dr. White has authored several acclaimed books that touch on socially responsible investing — most recently, “Broken America: Ten Guiding Principles to Restore America” and “Opportunity Investing: How to Revitalize Urban and Rural Communities with Opportunity Funds.” In his book “Opportunity Investing,” Dr. White goes into great detail about how investors can leverage QOZs to help residents in these economically distressed zones and be rewarded for their purpose-driven investments.
Opportunity investing normally involves the establishment of investment funds, known as opportunity investment funds or opportunity funds, that are used to invest in real estate and business development in QOZs. To be eligible for preferential tax treatment, opportunity funds must invest at least 90 percent of their assets in QOZs.
Opportunity funds must make “substantial improvements” to properties in QOZs, which regulations define as financial investments that are equal to or exceed the amount paid for the property. These improvements must be made within 30 months of obtaining the property. Certain types of properties — including golf courses, country clubs, liquor stores, suntan facilities, and racetracks — are not permitted to be included in opportunity investing.
The US Internal Revenue Service explains that opportunity funds are meant to serve as an economic development tool, one that was established with the goal of spurring “economic development and job creation in distressed communities.”
“If businesses in QOZs thrive, the communities will have more jobs and better salaries to offer,” explains Dr. White. “As these types of improvements take place, more people will want to relocate to these areas, which will increase real estate values and breathe new life into local shops and stores. As residents and business owners improve their financial standing, they spend more money on beautifying their homes, storefronts, public buildings, streets, parks, and monuments. Opportunity investing serves to improve infrastructure, decrease crime, and make better health care available for residents. Spread out over many communities, opportunity investing can help our nation flourish as a whole.”
QOZs have been established in all 50 US states, Washington DC, and several US territories. The US Treasury provides investors with an up-to-date list of QOZs. The extent of tax relief provided by opportunity investing depends on the length of time investors hold on to investments. Investors must hold properties for at least five years, at which point they receive a 10 percent exclusion of deferred gain on their investment. After 10 years, investors do not owe federal income tax on the funds appreciation, the value of which is set at the date of sale.
By combining socially responsible investing with considerable tax advantages, opportunity investing provides purpose-driven entrepreneurs with opportunities to experience financial gains while making big impacts and leading industry-wide growth and change.
“To me, opportunity zones represent opportunity knocking,” says Dr. White. “Opportunity investing is a win-win-win for investors, business owners, and citizens of urban and rural QOZ areas.”