3 Ways to Invest in Iowa's Qualified Opportunity Zones

February 21, 2019 | Mark K. Phillips

Mark K. Phillips, Cash Management Services Manager, Bank Iowa

When I first learned of the prospects of opportunity zones in Iowa, my imagination went wild.

Opportunity zones are low-income census tracts identified by economic development leaders as distressed communities worthy of attention and investment.

I could think of 30+ clients who could benefit in a huge way from participating in the program. I spent the rest of that week on the phone making sure every single person I knew who was in a position to leverage this program knew about it and was thinking expansively.

It’s not every day you get to save (and earn!) money by helping others.

More than 31 million people live in qualified opportunity zones across the U.S. In Iowa, 62 communities in 44 cities were selected to be opportunity zones.

Created to unleash capital otherwise locked in highly appreciated assets, opportunity zones provide investors higher after-tax rates of return. The idea, of course, is to incentivize more capital investments while reducing the cost of capital.

If you’re looking for ways to leverage tax incentives in 2019 while also helping revitalize Iowa’s deserving urban and rural communities, consider these three ways to get involved:

Buy or Develop Property

A direct investment in a tangible property within a qualified opportunity zone is one way to realize the tax benefits of the state’s program. Investors are allowed to operate within the Working Capital Safe Harbor, which allows as many as 30 months to acquire, construct or rehabilitate a business property, so long as a written plan is adopted and followed.

Combine with Other Tax Incentives

Opportunity zone benefits can be combined with other tax incentives, such as the low-income housing tax credit, historic tax credit or new markets tax credit.

Invest Capital Gains from Sale of Company Shares

Company owners about to deploy their succession plans are often concerned about the tax ramifications of associated capital gains. The Opportunity Zone Deferral program allows these individuals to reinvest realized capital gains into the communities that mean the most to them.

The result is temporary deferral of taxable income until the investment is disposed of or Dec. 31, 2026, whichever comes first.  In addition, investors can receive a step-up in basis for the capital gains of up to 15 percent depending on how long the investment is held in the opportunity fund. Permanent exclusion from taxable income is granted to those who hold the investment for at least 10 years. According to the Economic Innovation Group, after 10 years, an investor would see an additional $44 for every $100 of capital gains reinvested into an opportunity zone compared to an equivalent investment in a more traditional stock portfolio.

Contributing to the long-term viability of Iowa cities and towns is a value shared by many of the state’s most successful individuals and corporations. As you meet with your CPA this tax season, ask how you might step up efforts in this area while also realizing tax benefits that can help you achieve your most pressing financial goals.

It’s important to fully understand the opportunity zone fund structure before making any moves to invest. Be sure to consult your financial team, which should include your banker, CPA and attorney, before taking your plan into action.

Mark K. Phillips is cash management services manager for Bank Iowa, Iowa’s second largest family-owned financial institution. He can be reached at mkphillips@bankiowa.bank. To learn more, visit bankiowa.bank. Member FDIC.