Opportunity Zones – Meet Impact Investing

The new Tax Cuts and Jobs Act (the “Act”) created new tax incentives for the ownership and development of property in federally designated Opportunity Zones.  An Opportunity Zone is an economically distressed community that is nominated by a State and certified by the Internal Revenue Service.  What is interesting about the Act is that it allows for the deferral of some, or all, of the gain associated with the sale of a business, real estate, stock, or other capital assets, by electing to roll-over the gain within 180 days of the sale, into a Qualified Opportunity Fund (“QOF”).   All taxes on the gain can be permanently avoided if the taxpayer maintains his investment in a QOF for a period of at least 10 years, and partial deferral for 5 and 7 year investments.

A QOF is a self-certified fund that invests in property located in an Opportunity Zone.  You can find all of the property that is in a federally certified Opportunity Zone on the U.S. Department of the Treasury’s Community Development Financial Institutions Fund website at http://www.cdfifund.gov.

The big opportunity, however, is to create an Impact Investment Fund that is designated as a QOF with investors who have a genuine interest in making a difference in economically disadvantaged areas over time.  Impact Investing is a popular term among family offices who want to invest in business activities that tend to have a social, environmental, or other positive impact on the world.  While some people view impact investing as a charitable mission in part, smart investors find a way to realize solid investment returns over time.  In fact, the goal of most modern day impact investment funds is to have a sustainable impact and to make good money so that they can continue to do it over and over again. These funds simply have a longer term investment focus than most funds.  The U.S. government is now willing to be your co-investor in these funds and projects by allowing you to defer the tax on the gain from your previous endeavors.  If you maintain your investment for at least 10 years, you also get to keep the government’s share of the co-investment which is the tax that you would have otherwise paid.

Now could be the perfect time to sell your business and defer some of the gain into an QOF so long as your new mission is to reinvest in economically disadvantaged communities across the United States.  The new Act presents a Win-Win strategy for investors who have both a passion to make a difference and a desire to make money along the way.

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