What Are Qualified Opportunity Zones?
- Posted: May 14, 2019
- Posted by: Travis Lynk
- Last Reviewed: May 14, 2019
The Opportunity Zone program is one of the lesser known provisions contained in the 2017 Tax Cuts and Jobs Act. Its purpose is to stimulate development in economically distressed areas.
While most of the country has recovered from the 2008 recession, there are still areas of stubbornly high unemployment in the United States. These areas have been the target of numerous government programs such as the New Markets Tax Credits and Empowerment Zones, but due to onerous regulations and weak incentives, the results have been mixed.
The Opportunity Zone program addresses those administrative flaws. Through changes in existing tax codes and generous tax incentives, the Opportunity Zone program seeks to attract private investment in low-income communities. Taxpayers have the opportunity to build wealth through socially responsible investing.
Defining an Opportunity Zone
State and territorial governors nominated census tracts within their jurisdictions with a poverty rate of at least 20% or a median family income at or below 80% of the statewide median family income. Governors could nominate up to 25% of qualifying low-income communities for certification by the U.S. Department of the Treasury.
Investments in Opportunity Zones are eligible for capital gains tax incentives, including deferral of tax payments and potential reduction of up to 15% of capital gains tax liability.
Benefits of Opportunity Zones
There are significant potential benefits to taxpayers with realized capital gains who take advantage of the Opportunity Zone program. In addition to materially benefitting disadvantaged communities, tax benefits for capital gains from asset sales invested in a Qualified Opportunity Fund include the following:
- No capital gains tax payments until December 31, 2026 (or until the asset is sold, whichever occurs first) on untaxed gains invested in a Qualified Opportunity Fund
- Capital gains tax reduction of 10% on Qualified Opportunity Fund investments held at least five years, with an additional 5% reduction (for a total of 15%) on investments held for seven years
- Capital gains tax exemption on the appreciation of any Qualified Opportunity Fund investments held for at least 10 years
- Option to combine this program with other tax credits such as New Markets Tax Credit and 1031 Exchanges
Investing in an Opportunity Zone
The only way to invest in Opportunity Zones is through a Qualified Opportunity Fund, which is a self-certifying entity structured as either a corporation or a partnership and formed with the express purpose of investing in Opportunity Zones.
Qualified Opportunity Funds can invest in Opportunity Zone business property, take a partnership interest in an Opportunity Zone business, or buy stock in the same. Funds must invest at least 90% of assets in qualified Opportunity Zone property to be eligible for capital gains tax incentives.
The Opportunity Zone program gives funds the flexibility to pursue different investment goals. Qualified Opportunity Funds can be structured around different objectives. For example, one fund may focus on small business development within a particular Opportunity Zone, while another may invest in affordable housing across a number of Opportunity Zones.
Qualified Opportunity Zones offer a unique opportunity to bring private equity into the communities most in need of revitalization.