The Investing in Opportunity Act
Affordable housing, distressed communities and investors stand to benefit from new tax advantages in the Investing in Opportunity Act
The recently passed tax bill contains special provisions as it relates to affordable housing. Included with the new tax package is the Investing in Opportunity Act which intends to draw private capital back into distressed communities by providing tax advantages to investors. The original legislation was first introduced by Senators Tim Scott and Cory Booker and Congressman Pat Tiberi and Ron Kind with true bipartisan support.
One in six Americans live in economically distressed communities in the US. As an impact invest firm, DRI Fund‘s mission is to help these underserved communities. Naturally, we wanted to learn more about the Act.
How does the Investing in Opportunity Act work and how do both investors and communities benefit?
Investors benefit through deferring capital gains taxes by reinvesting those gains into a recognized “Opportunity Zone.” Currently, more than $2 trillion in cap gains are sitting on the sidelines. For investors with stagnant capital, but who are more than willing to locate new opportunities, capital gains taxes can be reduced if held for five to seven years. Capital gains can be temporarily deferred only if they’re reinvested back into a designated Zone.
Such zones are listed as “low income” and designated by census tract. State and local discretion is also a key element in the Act. State Governors are able to designate up to 25 percent of all tracts within the state that meet the guidelines used to designate a zone as economically distressed. This puts private capital where it’s truly needed.
Investors are encouraged to pool their resources into “Opportunity Funds.” “Many investors are willing to provide the capital, but lack the wherewithal to locate and execute investment opportunities in communities that need it.” says the Economic Innovation Group. Fund managers will deploy capital in areas that desperately need redevelopment eligible for investment and renewal.
Revitalized communities benefit in a number of ways. As capital investment is placed in an approved Opportunity Zone, the local economic engine begins to hum. Greater economic activity encourages more capital, employs more people and generates more tax revenue for the state and local economy.
Opportunity Zones qualify for investments by Community Development Financial Institutions, or CDFIs. Originally introduced some 25 years ago, a CDFI is a United States Treasury recognized private entity whose mission it is to revitalize communities in economic distress. A CDFI serves state and local banks and financing entities support disadvantaged communities and affordable housing. Individual investors can also provide capital to a CDFI who then in turn pour those funds into needed areas. Although 25 years before the implementation of the Opportunity Act, the overall benefits and philosophies are remarkably the same.
“There are more than 52 million citizens that live in underserved cities and towns in the United States. The Investing in Opportunity Act could provide enough of an incentive for investors to get off the sidelines and put their money in a vehicle that has a direct social impact in underserved communities, said Steven Kirsch, Managing Director and Chief Operating Officer DRI Fund, an official CDFI.
The Investing in Opportunity Act is set to be a major catalyst to spur the redevelopment of American communities and businesses across the country.