Have you heard of Opportunity Zones? Many haven’t. The program created in the 2017 tax overhaul spurs economic development in low-income neighborhoods.
Investors around the country are expected to funnel billions of dollars into funds targeting developments and businesses in these areas. One of those funds recently said its first investment would be in Houston.
What are Opportunity Zones?
The Opportunity Zone program was created to revitalize economically distressed communities using private investments rather than taxpayer dollars. To stimulate private participation in the Opportunity Zone program, taxpayers who invest in Qualified Opportunity Zones are eligible to benefit from capital gains tax incentives available exclusively through the program.
To qualify for nomination as an Opportunity Zone, a census tract must meet the following low-income requirements as defined by US Internal Revenue Code Section 45D(e):
- A poverty rate of at least 20%; or
- A median family income of:
- No more than 80% of the statewide median family income for census tracts within non-metropolitan areas.
- No more than 80% of the greater statewide median family income. Or the overall metropolitan median family income for census tracts.
Under this scope, 57% of all neighborhoods in America were up for consideration as Opportunity Zones. The US Treasury assessed each nominated census tract and and certified those that met the program criteria. The US Department of Treasury officially certified more than 8,700 tracts as Opportunity Zones in June 2018, constituting roughly 12% of all census tracts in the US.
Essentially, Opportunity Funds can only invest in the construction of new buildings and the substantial improvement of existing unused buildings. An Opportunity Fund must invest more in the improvement of the building than it paid to buy the building. Whether the building is constructed from the ground up or improved, the development of the building must be completed within 30 months of purchase.
What’s In It for Investors?
When an investor divests an appreciated asset, such as stocks or real estate, they realize a capital gain, which is a taxable event. Under program, if an investor reinvests a capital gain into an Opportunity Fund, they can defer until April 2017. That will reduce their tax liability on that gain. Beyond that, they can also potentially receive tax-free treatment for all future appreciation earned through the fund. Together, these tax incentives can boost after-tax returns for Opportunity Fund investors:
Those who hold their Opportunity Fund investment for at least 10 years can expect to pay no capital gains taxes on any appreciation in their Opportunity Fund investment.
The IRS has since the passage of the law released regulations that clarify aspects of the law. For more on this, Forbes has an excellent article. It goes without saying that you never make these type of investments without the professional advice of an attorney.
The first Opportunity Zone was created in Vicksburg, a city where 68 percent of the population is black or African American.
“As a mayor of the city and a former legislator for 25 years, I’ve never seen any piece of legislation that allows more collaboration between federal, state and local gov’t,” Mississippi mayor George Flaggs said, thanking Trump for his tax cuts and support.
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