Tucked into the 2017 Tax Cuts and Jobs Act was a unusually bipartisan tax initiative passed by Congress. Government-designated Qualified Opportunity Zones were intended to be a boon to underserved communities and investors alike, and both Republicans and Democrats appeared to be steering in the same direction. Now, as the rules continue to evolve, it seems another kind of entity is jumping on board: nonprofits.
Nonprofits Enter the Opportunity Zone
Back in 2007, Habitat for Humanity purchased a 120-acre mobile home park in Charlottesville, Virginia to transform a depressed community into a vibrant city-within-a-city. Just as the nonprofit builds single-family homes to turn residents into homeowners, this new site would make a larger impact in a single wave. The 340-unit park would be transformed to include single-family homes, townhouses, retail space and more. However, the $20 million that Habitat for Humanity has already invested will not cover the cost of the project’s full scope. Now, Habitat for Humanity of Greater Charlottesville is turning to the bipartisan tax initiative Opportunity Zones.
According to CEO Dan Rosensweig, Opportunity Zones are a “natural fit” to Habitat for Humanity’s goals and mission. “We would have to attract significant investment one way or another, and we think this has a lot of potential.”1
Another nonprofit setting its sights on Opportunity Zones is the Rockwood Community Development Corporation out of Oregon. President Brad Ketch intends to offer “two pools of money for Opportunity Zone investment: a micro-cap limited partnership fund for investment in businesses and a real estate limited partnership” which will help fulfill the organization’s mission to build affordable housing.2
Investing Across Scope and Scale
Although Opportunity Zones will certainly evolve over the coming months, there is reason to be optimistic from both a community and investor perspective. Clearly, nonprofits see the benefits of tapping high-income investors to support worthy causes that will also reap savings through tax incentives. And philanthropic investors can now funnel profits into economic areas of the country in dire need of support and be rewarded for their generosity. Investing in a potentially profitable piece of real estate that helps rebuild a neighborhood while saving on capital gains taxes is a win-win-win. Moreover, because Opportunity Zones will likely come in at varied price points, their funds may attract an array of socially conscious investors even with limited capital gains to spend. For example, younger investors cashing out on early profits from start-ups or stock sales may choose to support community entrepreneurs through Opportunity Funds; not all Opportunity Funds are real estate. Funds can support a variety of local businesses. It’s important to note, however, that in order to reap the full tax benefits, investors need to think long term.
By the Numbers:
Realized capital gains can be deferred when reinvested in a qualified Opportunity Fund within 180 days.
Investors who stay in an Opportunity Fund for seven years can earn a 15 percent tax break on the deferred capital gains.
Investors who stay in an Opportunity Fund for 10 years are not taxed on capital gains profits from their investment.
Deferral period ends in 2026 so investors must enter Opportunity Funds by the end of 2019 to receive the full tax break benefits.
As more Opportunity Zones projects are developed, they are likely to attract investors who want to make a profit and benefit from government-sanctioned tax incentives. They are also likely to attract the attention of philanthropists who want to choose projects with purpose and spread their generosity as strategically as possible. What communities would you most like to support?
If you’d like to learn more about Qualified Opportunity Zone Funds, please contact the Shorewood Real Estate Group for more information and inquire about our newest Opportunity Zone projects in the New York City area.
S. Lawrence Davis