Not Enough Affordable Housing in America
Housing prices and mortgage rates continue to rise across the United States. In some areas, housing prices are increasing by 6.7% annually, and some estimates put mortgage interest rates at 5.8% for 30-year mortgages by the end of this year.
Increasing mortgage rates translates into increasing rental prices for those properties that aren’t owned free and clear.
Unfortunately, wages for jobs are not rising at parallel rates. Low-income Americans, already struggling to keep their heads above water, feel the squeeze becoming a vice grip. A full three-fourths of take-home pay goes to rental payments for millions of low-income people in the United States.
Federal, state, and local governments have tried various solutions, including issuing vouchers, granting tax credits, launching initiatives, and implementing assistance programs. However, at the end of the day, affordable housing is still in short supply.
Surprisingly perhaps, in this bleak picture, investors can make a difference. It’s a difference that is more than just charitable; there’s a benefit attached. It comes about through the Tax Cut and Jobs Act of 2017, in which Congress provides for Opportunity Zone projects designed to bring additional affordable housing to low-income Americans.
The Benefit to Investors of Opportunity Zone Projects
Opportunity Zones Explained
Opportunity Zones are state-defined geographic areas where there is a low-income population. This zone cannot encompass the total population; it can only cover 25% of the area. In other words, an Opportunity Zone is only a quarter of the area in which low-income people live in a particular city.
Within that zone, home buyers may invest in properties with capital gains income and enjoy tax deferment (or even dismissal) on that income.
The idea is to incentivize investors to purchase properties in low-income areas, improve them, and add to the availability of affordable housing. (Properties must be visibly improved; they must also meet certain criteria to qualify as an Opportunity Zone project.)
The hoped-for by-product of this real estate activity, in addition to the first goal of increasing housing availability–is an economic boost to the community: more jobs, more business, and more construction.
Opportunity Fund Details
Opportunity Funds are investment vehicles designed for use with Opportunity Zone projects. An investor who uses an Opportunity Fund must put at least 90% of the fund’s assets into the Opportunity Zone project.
An investor can fund his or her Opportunity Fund with capital gains income. Doing this, and then using the Fund for a Zone project, qualifies the investor for tax-deferment (and tax reduction by up to 15%) until the end of 2026. Even better, taxes on the capital gains can be dismissed outright if the Zone project is held for ten years or more.
The Contribution and the Benefits
Investors with knowledge of Opportunity Zone projects and Opportunity Fund benefits can both make a difference and realize gains. Purchasing and improving a Zone property can help create growth, promote stability, and offer an opportunity for residents of low-income communities. Some investors will find it motivating to be a solution for an underprivileged demographic—to know that their projects are contributing to the rejuvenation of a downtrodden population.
Investors who choose to put capital gains income into an Opportunity Fund and then use that fund for a zone project stand to realize significant tax breaks—and even tax dismissal. This is a huge benefit for investors who would otherwise face stiff taxation on capital gains.
Investors can find Opportunity Zones in their own cities by visiting the Opportunity Zones Resource page. No special dispensations or licenses are needed to take on a Zone project.