What Local Governments Need to Know About Opportunity Zones
- Posted: April 12, 2019
- Posted by: Travis Lynk
- Last Reviewed: April 12, 2019
The bipartisan Investing in Opportunity Act was part of the 2017 tax overhaul and established the Opportunity Zone program, which is designed to stimulate private investment in economically distressed communities. Under the act, investors defer taxes on capital gains reinvested in Opportunity Zone property. There are more than 8,700 designated Opportunity Zones spread across all 50 states and Washington, D.C.
Although the U.S. Department of the Treasury is responsible for drafting Opportunity Zone guidelines, local leaders can take steps now and develop strategies to identify investment-ready projects that will attract investment dollars.
How Do Opportunity Zones Benefit Investors
Investors who realize capital gains after the sale of property can reduce their tax liability by up to 15%, and defer paying capital gains taxes, if they channel those gains into an Opportunity Fund within 180 days of the sale.
Specifically, investors may qualify for the following tax benefits:
- Capital gains taxes are deferred until 2026, or until the investment is sold, whichever is sooner.
- If the investment is held for five years, capital gains taxes are reduced by 10%.
- If the investment is held for seven years, the taxes are reduced by an additional 5%, for a total of 15%.
- If the investment is held for 10 years, investors will owe no capital gains taxes upon sale of the asset.
Taxpayers who invest capital gains in an Opportunity Fund prior to the end of 2019 will see the greatest benefit from the program, since assets must be held for seven years to receive a 15% reduction on capital gains tax payments due in 2026.
How Can Opportunity Zones Benefit Local Communities?
Opportunity Fund investments seek to stimulate positive growth in economically challenged communities. Although the program allows Opportunity Fund investments in both businesses and real property within Opportunity Zones, the rules are structured to favor real estate investments.
Real estate investments can take the form of building new structures, such as affordable housing or commercial buildings, or purchasing and improving existing structures. If an Opportunity Fund invests in an existing structure, it must spend more on improving the structure than it spent to purchase the structure. Whether the development is new construction or improvements on existing structures, work must be completed within 30 months of purchase.
Some states, cities, and communities are considering additional tax credits and incentives to attract the type of investments that most benefit their communities.
Ideally, local communities will see new job opportunities, improved local infrastructure and services, and an expanded tax base from Opportunity Zone development.
How Can Local Governments Attract Opportunity Zone Investments?
The first step for local officials is to familiarize themselves with the timing issues involved in maximizing Opportunity Zone tax benefits for investors. To take advantage of the full 15% reduction in capital gains taxes, an Opportunity Fund must have at least 90% of its capital invested in Opportunity Zone assets by December 31, 2019.
This means local leaders should be actively involved in identifying investment-ready assets and projects that offer the most benefit to the local community. They should also develop proactive strategies for incoming capital that both protect existing community residents and attract Opportunity Fund capital.
The following steps may be helpful for community leaders and officials promoting Opportunity Zone projects:
- Build an Opportunity Zone team with expertise in real estate development, finance, risk management, marketing, data management, and reporting that can serve the needs of both the community and interested developers.
Survey existing assets to identify key properties and take steps to secure control over these properties with an option to purchase. This protects the community against developers looking to acquire and dispose of key assets without consideration for public interest.
- Identify development goals for key properties that are consistent with the public good, and undertake predevelopment activities to make these properties attractive to investors.
Survey remaining assets in the jurisdiction to identify additional development opportunities ready for investment and take steps to enhance their potential value to investors.
- Create a marketing plan to aggressively market these assets to Opportunity Fund investors. Develop criteria for evaluating potential developers to ensure the most advantageous deals are made while still protecting the local community’s interests.
Be alert to speculators and investors who are not focused on the public interest. This is especially important with regard to key properties; make sure any agreement includes a mechanism to reacquire these properties if the developer fails to uphold his responsibilities. There is nothing in the legislation that requires Opportunity Fund investors to protect the public interest; it is up to local officials to make sure the community’s needs are prioritized.
- Strategic Tax Planning with Opportunity FundsRead MoreFebruary 28, 2019
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