The main benefits of investing in Opportunity Zones are the tax incentives offered by the program. According to Commercial Real Estate Loans, investors may defer capital gains taxes until they sell their investment or by December 31, 2026, whichever occurs first. In addition, investors who keep their money in an Opportunity Fund for at least 5 years will receive a 10% reduction of their capital gains tax liability, while those who keep their investment in the fund for at least 7 years will receive an additional 5% discount, for a total 15% capital gains tax discount. And, in what may be the most appealing element of Opportunity Fund investing, investors who keep their money in an Opportunity Fund for at least 10 years will not have to pay any capital gains taxes on any additional appreciation their investment has experienced since it was placed in the fund.

According to Multifamily Loans, investors must invest through an Opportunity Fund in order to qualify for the tax incentives offered by the program. An Opportunity Fund is a partnership or corporation which plans to invest a minimum 90% of its assets in Opportunity Zones. Opportunity funds permit investors to avoid paying taxes on recent capital gains until December 31, 2026. If an investor keeps their money in an Opportunity Fund for at least 5 years prior to December 31, 2026, they will reduce their deferred capital gains tax liability by 10%, while if they keep funds in for seven years before that date, they can reduce their tax bill by 15%. In some cases, investors may even reduce their tax liability to zero on any profits they generated by investing in an Opportunity Fund, though they will need to hold their investment in the fund for at least 10 years in order to qualify. In addition, it’s important to realize that Opportunity Funds can self-certify, meaning that they do not specifically need to be approved by the government.

In order to qualify for the LIHTC program, a building must reserve a certain number of units for low-income residents. In most cases, they must either follow one of two “rules”: the “20/50 rule” or the “40/60 rule.” The 20/50 rule requires that at least 20% of a property’s units be rented to tenants who earn 50% or less of the area median income (AMI), while the 40/60 rule requires that at least 40% of a property’s units be rented to tenants who earn 60% or less of the AMI. In addition to the above, a gross rent test must also be passed. This test requires that rents for the property do not exceed 30% of either 50% or 60% of AMI (the exact percentage depends on the number of rental units set aside for the credit). LIHTC properties are required to pass these income and rent tests for a period of no less than 15 years — or risk having the tax credits recaptured by the local housing authority.

In order to qualify for the Low-Income Housing Tax Credit (LIHTC) Program, a property must pass at least one of three affordability tests:

• 20% or more of the units are occupied by (or reserved for) tenants with an income of 50% or less of the area median income (AMI).
• 40% or more of the units are occupied by (or reserved for) tenants with an income of 60% or less of the AMI.
• 40% or more of the units are occupied by (or reserved for) tenants with an income of no more than 60% of the AMI, and the property has no units occupied by tenants with an income greater than 80% of the AMI.

In addition, a gross rent test must also be passed. This test requires that rents for the property do not exceed 30% of either 50% or 60% of AMI (the exact percentage depends on the number of rental units set aside for the credit). LIHTC properties are required to pass these income and rent tests for a period of no less than 15 years — or risk having the tax credits recaptured by the local housing authority.

For more information, please visit apartment.loans/posts/what-is-the-lihtc and www.hud.loans/hud-loans-blog/lihtc-program-hud-multifamily-loans.

The main risk associated with investing in Opportunity Zones is that the investor may not be able to take full advantage of the tax benefits of the program. In general, most experts believe that it’s not worth investing in an Opportunity Fund unless you have a minimum 10-year investment horizon. This way you can take full advantage of all of the tax benefits of Opportunity Fund investing. Therefore, if an investor is elderly, in poor health, or may need to use their funds within a few years, investing in an Opportunity Fund may not be the best choice.

In addition, Opportunity Funds must invest 90% of their assets in eligible real estate or businesses located inside a Qualified Opportunity Zone. The U.S. Department of the Treasury will conduct an asset test twice annually to ensure compliance. Funds who do not meet the asset test will be levied a variable fee (currently set at 6% per year) until they reach compliance.

To be eligible, a property must either be new construction, or if it is a rehabilitation project, the Opportunity Fund must invest equal or greater funds into property improvements than it did to initially purchase the property. However, a recent regulatory ruling posits that this only applies to the cost of the building, not the cost of the land.

For an Opportunity Fund to invest in a business, the business must not be in a prohibited category. Prohibited business categories include liquor stores, massage parlors, gambling-related businesses, golf courses, tanning salons, and several other types of “sin” businesses. Despite this, an Opportunity Fund can generally own property that is being leased to these businesses, they just cannot own shares in these types of businesses themselves. Plus, the business must do at least 70% of its business inside the Opportunity Zone in order to qualify.

Investors who invest in Opportunity Zones through an Opportunity Fund can defer capital gains taxes until they sell their investment or by December 31, 2026, whichever occurs first. In addition, investors who keep their money in an Opportunity Fund for at least 5 years will receive a 10% reduction of their capital gains tax liability, while those who keep their investment in the fund for at least 7 years will receive an additional 5% discount, for a total 15% capital gains tax discount. And, investors who keep their money in an Opportunity Fund for at least 10 years will not have to pay any capital gains taxes on any additional appreciation their investment has experienced since it was placed in the fund.

Source: www.commercialrealestate.loans/commercial-real-estate-glossary/opportunity-zones and www.multifamily.loans/apartment-finance-blog/a-guide-to-the-opportunity-zones-program