Opportunity Zones & Taxes

What you need to know.

THE OVERVIEW

The Opportunity Zone (OZ) program was created to revitalize an economically-distressed community where new private investment, under certain conditions, may be eligible for preferential tax treatment. Simply put, OZs are an economic development tool designed to spur economic development and job creation in distressed communities.

OZs were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017. The OZs are created through the process of nomination and designation. To qualify as OZs, localities must be nominated by the state and that nomination must be certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.

The first set of OZs, covering parts of 18 states, were designated on April 9, 2018. There are more than 8700 OZs covering parts of all 50 states, the District of Columbia, and five U.S. territories.

HOW DESIGNATED OPPORTUNITY ZONES ARE DESIGNATED

The criteria within a state that can be designated as qualified opportunity zones are as follows:

    1. In a state, a total of 25 census tracts may be designated as OZ provided the number of low-income communities (LIC) is less than 100.
    2. If the number of LIC’s is more than 100, then the maximum census tracts which can be designated as OZs would be equal to 25% of the total number of LIC’s.
    3. Not more than 5% of the census tracts designated as qualified OZs in a state can be non-LIC tracts.

%

of census tracts in a state that can be designated as opportunity zones

%

census tract must have at least a 20% poverty rate

%

median income must not exceed 80% of metro or state level

OZ designation remains in effect for 10 years

QUALIFIED OPPORTUNITY FUND

A Qualified Opportunity Fund (QOF) is an investment vehicle set up as either a partnership or corporation for investing in eligible property located in a Qualified Opportunity Zone.

%

QOF should hold at least 90% of its assets in a qualified OZ property.

Stock oR Partnership

QOF property can be a stock or partnership business located within an OZ.

12/31/17

QOZ property should be acquired after 12/31/17

HOW QUALIFIED OPPORTUNITY ZONES WORK

    1. Investors should reinvest capital gains from the sale of an asset within 180 days into a Qualified Opportunity Fund.
    2. The fund then invests in a qualified Opportunity Zone (OZ) property.
    3. Within the OZ, they can be invested in real estate, business, or infrastructure projects.
    4. Geographically restricted but inclusive of various kinds of investment.

BENEFITS TO INVESTORS

Opportunity Zones are designed to spur economic development by providing tax benefits to investors.

  • Capital gains reinvested in a QOF will receive a temporary tax deferral. This deferral will be recognized on the date when the investment is sold or on December 31, 2026, whichever is earlier.
  • The basis of the original investment goes up by 10 percent if the investment is held for at least five years and by an extra 5% if it’s held for at least seven years. In other words, If the investor holds the investment in OZ for 7 years, as much as 15 percent of the original gain would avoid taxation.
  • If an investment in a QOF is held for at least 10 years, there will be no tax on the profits produced by the sale of an investment.

ECONOMIC BENEFITS

  • Geared towards economic development and growth of low-income / underdeveloped areas.
  • An outlet for non-real estate investors to unlock their capital gains.
  • Many OZs are in areas attractive to investors.

Source: CBC Research, IRS, Congressional Research Service