Information Applied is Knowledge
The world stopped on Sunday for a lot of people after the news that Nipsey Hussle had been killed— even for those who didn’t know know him personally but were inspired by him. To see someone from the community who was inspiring people through action and investing back into his community was a blow. I saw a lot of people with similar goals, myself included, take it hard.
But then I thought about how dwelling in that devastation could be detrimental to growth. Even though he’s dead, the positive impact of his life is felt today, and that’s what matters most: continuing to learn and share something that will outlive you.
So the marathon continues.
One of the things he’d recently done with his business partner, Dave Gross, was come up with plan to take advantage of so-called “Opportunity Zones” and invest back into his neighborhood and other neighborhoods nationally. It’s a fairly new program, so I wanted to give the ins and outs of it.
What are opportunity zones?
The goods news is the program just started so you’re not behind. Educate yourself because when the results start to show it will be too late.
A key point to note is that capital gains are the only types of funds you can invest into opportunity zones, also known as OZ.
Capital gains are the profits you receive when you sell stock or real estate, money that is usually taxed by the IRS. But by investing this profit into qualified opportunity funds within 180 days, you can bypass capital gains taxes. After five years, the percentage you owe drops by 10%, 7 years- 15%, 10 years- tax free.
Opportunity zones pretty much are neighborhoods that are “distressed,”meaning low-income areas that haven’t been invested in for a while. The federal government has started a program lt that rewards you with a tax break, essentially making money tax-free, if you invest in these areas over a 10-year period.
Many investors nationally are raving about the benefits, but a lot of people don’t know about them, especially the people who live in these opportunity zones. For those who hate the idea of “gentrification”, childhood neighborhoods losing their identity, this is a way to take control of the situation with action. Just be aware that this type of investing is about gains over the long term. So don’t think about the short play.
It may not be something that can benefit investors right away, but I feel that this is a great tool for those with vision to have and know about. Could be the start of generational wealth, especially for those of us who already want to reinvest in the neighborhoods we grew up in.
You can find a map of the areas below:
How to invest in Opportunity Zones (The rules)
1. 1. You have to invest via a designated opportunity fund which has been set up through the IRS. These can be self-certified, set up by you, or you can put your money in an existing one. By certifying through the IRS, you are promising to abide by the rules that 90 percent of the money in that fund will be invested in opportunity zones.
2. 2. You can use the money from these designated funds to invest in real estate, stock ownership in businesses within opportunity zones, and partnership interest in businesses in the zones.
3. To Invest in real estate, you can build either from the ground up or rebuild an existing structure. If you rebuild an existing structure ( house or commercial property) you must invest more in improving the building than what you you paid to get it.
Example: If you paid $50,000 for the house, you have to put at least $51,000 into renovating it. Remember, these are are long-term buy and holds.
All work must be done within 30 months of purchase.
Hopefully you find this useful. The biggest thing to remember is that you can only invest capital gains, but you never know when you’ll run into an opportunity where you’ll have capital gains. The two cases I see most often are:
1. Kids who inherit homes that require too much maintenance, so they sell them.
b. People who have investment properties/rentals and want to sell them.
The time to do your research is now, before your capital gains opportunity comes along. Then when your opportunity arrives, you’ll be ready to act.