Affordable housing has become increasingly hard to find for lower-income Americans who, on the average, are allocating three-fourths of their take-home pay to rent alone. As rents continue to climb across the United States, the squeeze on struggling Americans does not show signs of letting up.
While many look to the government for a solution, the answer to the problem remains elusive. Housing initiatives, tax credits, homebuyer assistance programs, and housing vouchers provide relief for some but are still not a comprehensive fix. Homeownership, the American dream, is simply out of reach for millions of Americans who work long hours at low-paying jobs and are barely able to pay rent, let alone save toward a home purchase.
The impact of the crunch extends beyond financial. People who must allocate most of their paychecks to lodging find their income falling short in other vital areas, leading to feelings of frustration, failure, and hopelessness. Discretionary income for activities that relieve stress is just not available, and life becomes all about work, paying bills, and surviving.
In the middle of this crisis, the government has provided an opportunity for real estate investors to be part of a solution to the affordable housing problem. While it won’t make the problem disappear, it is one provision that can help.
This partial solution is the Opportunity Zones program established in the Tax Cut and Jobs Act of 2017 by Congress.
Opportunity Zones Defined
Opportunity Zones are geographic areas inhabited by low-income residents. They can exist in any city in the United States. An Opportunity Zone must be designated as such by the state government and can only comprise 25% of the total area inhabited by low-income residents.
Investors are incentivized to purchase properties in these zones through the granting of certain tax benefits. A homebuyer who invests capital gains income in an Opportunity Zone property will have the tax on that income deferred and, in some cases, even dismissed.
The goal of the Opportunity Zones program is to boost economic development through the provision of affordable housing in low-income areas. Business growth and job growth that arise as byproducts from the increase in affordable housing will stimulate the local economy.
Opportunity Funds for Opportunity Zone Properties
Homebuyers investing in properties in Opportunity Zones may utilize an investment vehicle called an Opportunity Fund. An Opportunity Fund may consist of an investor’s capital gains income which enjoys tax deferment until December 31, 2026, and additionally is reduced by up to 15%. If an investment is held for ten years or more, the taxes may be waived altogether.
To enjoy these benefits, an investor must use over 90% of the assets in the Opportunity Fund for an investment property inside an Opportunity Zone. An additional requirement is that the capital gains income be put into the Opportunity Fund within 180 days.
An investor must “significantly improve” a property for it to qualify for the Opportunity Zone program.
Investors now have a way to enjoy significant tax advantages while simultaneously making a contribution to an underprivileged segment of the population. By investing in projects in Opportunity Zones, homebuyer investors can catalyze growth, stability, and development.
Opportunity Zones that see much investor activity have the potential of significant revitalization. More affordable housing means more resident income available to flow into the local economy. Growth of this kind tends to bring hope and optimism to residents.
Opportunity Zones have been designated in cities across the United States. Anyone may invest in these zones provided they stay within the parameters of the Opportunity Fund and Opportunity Zone requirements. Visit Opportunity Zone Resources for information on Opportunity Zone locations.