Opportunity Zone Investing: 3 Tips to Help You Mitigate the Risks

Opportunity Zone Investing

Investing offers numerous benefits. Obviously, it’s a great way to build wealth if it’s done properly. Investing is also an effective way to help plan for future financial stability. At the same time, it can help combat the potential losses of inflation over time. Having said all that, not all investment opportunities are created equally. Some generate more returns than others whereas certain ones come with more risks than most people are willing to take. Still, millions of people are venturing into the investment market with high hopes. One increasingly popular option is investing in opportunity zones.

Opportunity Zone Investing Explained

For those of you who haven’t yet heard about this option, opportunity zones are areas throughout the United States that are facing extensive economical challenges. As such, they’re experiencing numerous hurdles in terms of growth and the funding needed to achieve it. To help spur growth in those areas, the Tax Cuts and Jobs Act was created in 2017. It gives people a chance to invest in qualified opportunity zone funds. From there, the money they and others invest is funneled into opportunity zones. As a result, struggling communities get the funds they need, and investors enjoy financial returns. Certain tax incentives have also been applied to these investments.

Mitigating the Risks of Opportunity Zone Investing

As far as investment opportunities go, opportunity zone funds are considered to be in the lower-risk category. That’s especially true when compared to the potential gains. Add to the mix the tax deferral opportunities, and the benefits become even more significant. Of course, even though opportunity zone funds are fairly safe investments, they’re not without their risks. Understanding the potential perils is the key to overcoming them.

Understand the Rules of Opportunity Zone Investing

Opportunity zone investing is governed by a long list of rules and regulations. Failing to follow the guidelines could lead to costly mistakes, such as significant losses and lofty tax penalties. You can’t simply allot a specific amount of money to a qualified opportunity zone fund at any time and reap the tax deferral rewards and other benefits. Be sure you fully understand the rules before making this type of investment. It may take a bit of time and effort, but it’ll go a long way toward reducing the risks in the long run.

Stay the Course

Though opportunity zone investing is still a relatively new concept, many investors have made the mistake of trying to cash in too quickly. They often see significant gains in the beginning and decide the worst may be yet to come. From there, they decide to withdraw their investments and take advantage of their gains before the minimum waiting period is over. In turn, they fall below the 90-percent capital gains threshold required to maintain their investments. That leads to a variety of problems in terms of tax deferral and other matters.

Choose Wisely

Since the inception of the Tax Cuts and Jobs Act, a growing number of opportunity zone funds have been developed. Some are larger than others. At the same time, some are more stable than others. On top of that, some have the potential for more gains than others. Consider the options carefully before deciding which opportunity zone fund to invest in.

Making the Most of Your Opportunity Zone Investment

Opportunity zones are comparatively safe investments with the potential for significant gains. They’re also complicated matters that require a great deal of thought and planning. Be sure you understand the regulations that apply to them before investing. Be patient and exercise caution when choosing an opportunity zone to invest in. Those measures can help minimize the risks while maximizing your returns.

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