Opportunity Zones are a powerful new economic development tool, designed to mobilize investment in underserved communities across the nation. The Opportunity Zones were established by Congress as a part of the Tax Cuts and Jobs Act of 2017. They are designed to encourage long-term private investments in low-income communities through a two-fold strategy: using temporary benefits to bring the investment in, and long-term benefits to keep it there. This not only results in increased tax savings for those making the investment, but also yields strong job creation and economic growth for these traditionally underserved communities.
This program works by providing a federal tax incentive for taxpayers who reinvest unrealized capital gains into "Qualified Opportunity Funds" (an “Opportunity Fund”). An Opportunity Fund is an investment vehicle organized, either as a partnership or corporation, for the purpose of investing in qualified Opportunity Zone property or businesses. The process for designating an entity as an Opportunity Fund is through a form (to be released by the IRS later this year), which is attached to the entity’s federal income tax return when submitted.
A key aspect of the Opportunity Zone Program is that it enables taxpayers to defer and potentially reduce the recognition of capital gains on the sale of capital assets. To achieve these benefits, the taxpayer must reinvest the capital gain proceeds into a qualified Opportunity Fund within 180 days of the sale. The information below provides a brief overview of the primary three benefits that can be realized from Opportunity Zones:
- Temporary Deferral: A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of or December 31, 2026.
- Step-Up In Basis: A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.
- Permanent Exclusion: A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.
The zones themselves are to be comprised of low-income community census tracts and designated by governors in every state. As of June 2018, the Department of the Treasury had certified the final round of states’ nominations, bringing the total number of qualified census tracts to more than 8,700 across all states, territories, and the District of Columbia. While the sites are spread across the nation and across each state, there are numerous sites located in the Southeast which are poised for new economic development opportunities. A list of all of the sites can be found through the Department of Treasury’s website.
Many anticipate that the Treasury Department will issue initial program guidance and clarification for the Opportunity Zone Program by the end of 2018, with final guidance expected in 2019. We are hopeful that this guidance will enable those considering the possibilities offered by Opportunity Zones to reap the benefits in an impactful way.
We will continue to follow the guidance on Opportunity Zones to best inform our clients about this exciting new economic development program. Please contact our experienced team of economic development lawyers or visit the Opportunity Zone page on our website to learn more.