Investors look for every way possible to get the highest return. The stock market is the first obvious choice, but rates fluctuate daily. Real estate is also a sound investment, but interest rates are at all-time highs. Those looking for a better way to reduce capital gains should consider investing in opportunity funds.
Opportunity funds allow investors to make money while also helping others. However, many don’t fully understand how these investments work. Here are some points to ponder when considering an opportunity fund investment:
What Is an Opportunity Zone?
These investments involve funding opportunity zones, which is nothing like buying stocks in the market. Instead, investors use their capital to invest in low-income communities across different parts of the United States. The goal is to boost economic growth through infrastructure development and job creation.
Congress first created qualified opportunity zones (OZs) under the Tax Cuts and Jobs Act of 2017. Today, investors can fund OZs in every state. Investors can locate OZs using census tract data. Any taxpayer can invest in an OZ through an opportunity fund.
Consider Capital Gains
Lowering capital gains is a goal of nearly all investors. Opportunity fund investments are an excellent vehicle for doing this. Currently, the maximum capital gains rate is 20 percent. However, investing in OZs allows investors to defer capital gains. Investors can instead reinvest the money saved into other ventures, allowing them to build wealth and obtain financial freedom.
Consider Investment Lengths
There are two standard investment timelines: short-term and long-term. Short-term investments allow investors to get in and out quickly, but they often come with higher risks. Long-term investments usually take years to mature. Opportunity funds are long-term. How long someone holds an opportunity fund determines the tax benefits they receive. For example, those who hold these investments for ten years don’t have to pay taxes on capital gains produced by the fund.
Consider Possible Risks
As with any investment, exploring the risk profile before investing in opportunity funds is always recommended. Since these are government securities, the IRS will ensure funds are invested properly. Six-month reviews are standard. If the OZ funding doesn’t meet specific requirements, the investor could face penalties or lose tax deferment benefits. Always weigh risk versus reward before investing long-term in OZs.
Consider Portfolio Diversification
Diversification is a strategy recommended by nearly all investors and tax experts. There are no “surefire” or “guaranteed” investments. Every investment comes with risk, including opportunity funds. Maintaining a diverse portfolio mitigates risk by protecting the investor against significant losses. Opportunity funds are great additions to an investment portfolio. However, these investments should not be the only asset.
Consider Investment Advisers
The IRS has strict guidelines for allocating OZ investments. Navigating OZs without proper guidance will only lead to problems down the road. Choosing investment advisers with experience and a proven track record is crucial. Look for firms that specialize in managing opportunity funds. Doing so will ensure OZ funding stays in compliance and deliver the biggest ROI possible.
Consider the Next Steps to Take
Do opportunity fund investments sound like the logical next step for your portfolio? Doing plenty of research is essential before buying into a fund. Not all funds are equal, and some pose more risk than others. Take the time to compare several different options before choosing a single fund. This step will ensure you enjoy all the tax benefits while making a big difference in low-income communities nationwide.