Welcome to the Land of OZ! If someone offered you the opportunity to make money and have taxes deferred or even reduced, you would probably take them up on the offer. What do you have to lose? This is a reality in the land of “OZ”. They’re called Opportunity Zones. What is an Opportunity Zone? I’m glad you asked. The Tax Cuts & Jobs Act offers incentives to to investors who invest in specified low-income metropolitan areas across the country called “Opportunity Zones”. Opportunity Zones are designated by government, based on the amount of poverty within an area. A person or business can invest in these areas and receive tax benefits. The longer they hold the investment, the bigger the percentage of tax deferment they receive. It’s the perfect investment to build generational wealth with by passing it along to their children. On the surface it seems like a good idea. The investors benefit from income and tax incentives and the community members benefit from communities with an improved economy. This could bring jobs, better housing, improved services and amenities, safety, etc for people within these communities. However, these areas are typically avoided because they don’t usually give the investor the best bang for their buck. The tax deferment and reduction is incentive for investors to invest in otherwise undesirable areas.
The tax benefit is for people using capital gains, aka, profit made from a sale that exceeds it’s original purchase price. Think real estate, stocks, bonds, etc. Pair that with people who have enough money to make a large investment and suddenly the majority of the people who live within these areas wouldn’t have access to the benefits of these investment opportunities. There’s also a concern about the amount of designated Opportunity Zones that also have sections with greater value than the nearby low-income areas they are aiming to improve. Most investors would prefer to invest in those areas over the low-income areas it was intended for. There is also very little in the way of guidelines or ways to determine whether or not the investments being made are helping the community. There is nothing preventing an investor from building a hotel, golf course and mid to high end restaurants in one of these areas. That doesn’t help the people who live there. All of this results in harming the people it was meant to help. Investments with no accountability to the original purpose are likely to do nothing but serve the wallet of the investor. If you think the rate of gentrification is too high now, just wait until Opportunity Zones catch on.