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Opportunity Zones: Aligning Public and Private Capital

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Opportunity Zones: Aligning Public and Private Capital

At the end of 2017, a potential $6.1 trillion in unrealized capital gains was available for reinvestment.

Throughout the U.S., unrealized capital gains have significant tax implications with enormous potential. Unrealized capital gains occur when the value of an asset has gone up on paper, but has not yet been sold for a profit. Taxes are triggered once the asset has been sold.

Investors can offset or defer these taxes in a few ways, including one new strategy: investing in opportunity zones.

Today’s infographic from Bedford Funds explains what opportunity zone funds are, their core benefits, and their potential impact across the country.

What is an Opportunity Zone?

Opportunity zones are U.S. Census tracts whose citizens experience economic distress.

Originating in the 2017 Tax Cuts and Jobs Act, they offer the potential to connect long-term capital with low-income communities across the country to drive return and impact.

How are opportunity zones chosen? The initial base is low-income census tracts, which have:

  • Poverty rates of at least 20%; or
  • Median family incomes lower than 80% of the surrounding area

The state’s governor or chief executive then nominates up to 25% of these areas as opportunity zones. Nationwide, a total of 8,700 opportunity zones exist, and 7.9 million of the areas’ residents live in poverty.

Overall, 35 million people live in these opportunity zones. There are a number of disparities between opportunity zones and notional averages across key variables:

Poverty RateMedian Family IncomeEducation*
Opportunity Zones27.1%$47,31618.1%
National Average14.1%$73,96531.5%

*Adult with Bachelor’s degree or higher

It’s evident these cities could benefit from increased investment.

What is an Opportunity Zone Fund?

An opportunity zone fund (OZF) is an investment vehicle that provides tax benefits for private capital to help revitalize economically distressed communities. Both operating businesses and real estate are eligible for investment.

Many investor types may take advantage of opportunity zone funds:

  • Corporations– Also includes partnerships
  • Accredited investors– Defined as high net worth individuals, brokers, and trusts
  • Nonresident foreign investors– Only on capital gains earned in the U.S.
  • Retail investors– Through funds that have lower minimums, though options are more limited

In addition to their wide eligibility, OZFs have a number of potential benefits.

Benefits

Tax breaks on capital gains can be organized into three tiers:

  • Initial Tax Deferral– Once the previously-earned capital gains are channeled into a qualifying OZF, federal tax is deferred until December 31, 2026 or the date the investment is sold— whichever comes sooner
  • Step-Up In Basis10% of the original capital gains will be excluded from federal taxes if an investment is held for five years
  • Capital Gains Tax Exclusion– Federal tax on capital gains earned within the OZF is 100% eliminated if an investment is held for 10 years

All things being equal, OZFs realize after-tax outcomes that are over 40% higher than a standard portfolio investment. For example, the potential after-tax value of a $100 investment after a 10-year holding period would be as follows.

Initial InvestmentNet after-tax value
OZF$100$175.30
Standard portfolio investment$76.20 ($100- 23.8% capital gains tax)$132.36

*Note: assumes long-term federal capital gains tax rate of 23.8%, no state income tax, and annual appreciation of 7% for both the OZF and alternative investment.

While it takes a few years to realize these tax benefits, OZFs have long-term horizons to encourage sustained investment with a lasting impact. The result is the potential for sustainable and equitable wealth creation.

Future Impact

Although real estate investments have captured significant attention, recent regulation has clarified that operating businesses are also eligible OZF investments.

By investing in businesses, OZFs can have a direct impact on economic growth and job creation.

Ultimately, OZFs have the potential to catalyze collective impact through their scalable operating company and real estate investments. Working directly with community leaders, OZFs can help drive long-term rejuvenation from within, versus gentrification from outside forces.

Opportunity zone funds are projected to raise $44 billion in capital designed specifically to invest in this future growth.

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An Investor’s Guide to Copper in 3 Charts

Explore three key insights into the future of the copper market, from soaring demand to potential supply constraints.

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An investor's guide to copper in 3 charts

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The following content is sponsored by iShares

An Investor’s Guide to Copper

Copper is the world’s third-most utilized industrial metal and the linchpin of many clean energy technologies. It forms the vital connections in our electricity networks, grid storage systems, and electric vehicles.

In this graphic, sponsored by iShares, we dig into the forces that are set to shape the future of the copper landscape.

How Much Copper Do We Need?

Copper is poised to experience a remarkable 54% surge in demand from 2022 to 2050.

Here’s a breakdown of the expected demand for copper across clean energy technologies.

Technology2022 (kt)2050P (kt)
Electricity networks43648862
Other low emissions power generation93.7142.2
Solar PV756.81879.8
Grid battery storage24.6665.2
Wind453.5 1303.3
Hydrogen technologies-0.22
Electric vehicles370 3582.9
Other uses19766 22382

Copper is vital in renewable energy systems such as wind turbines, solar panels, and electric vehicle batteries because of its high electrical conductivity and durability.

It ensures the effective transmission of electricity and heat, enhancing the overall performance and sustainability of these technologies.

The rising demand for copper in the clean energy sector underscores its critical role in the transition to a greener and more sustainable future.

When Will Copper Demand Exceed Supply?

The burgeoning demand for copper has set the stage for looming supply challenges with a 22% gap predicted by 2031.

Given this metal’s pivotal role in clean energy and technological advancements, innovative mining and processing technologies could hold the key to boosting copper production and meeting the needs of a net-zero future.

Investing in Copper for a Prosperous Future

Investors looking for copper exposure may want to consider an ETF that tracks an index that offers access to companies focused on the exploration and mining of copper.

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