The Tax Cuts and Jobs Act included a new federal incentive—Opportunity Zones—meant to spur investment in undercapitalized communities. Any corporation or individual with capital gains can qualify. This program presents opportunities for real estate investment and development in distressed communities.
OPPORTUNITY ZONES WERE CONCEIVED AS AN INNOVATIVE APPROACH TO SPURRING LONG-TERM PRIVATE SECTOR INVESTMENTS IN ECONOMICALLY AFFECTED URBAN & RURAL COMMUNITIES.
What is an
An Opportunity Zone is an economically-distressed community where new investments, under certain circumstances, may be eligible for preferential tax treatment.
Basic Structure of an
Taxpayers can receive capital gains tax deferral for making timely investments in a Qualified Opportunity Fund (QOF). These funds are then invested in Qualified Opportunity Zone (QOZ) properties.
The vision is that Opportunity Zone (OZ) financing will spur redevelopment leading to job and individual wealth creation in targeted areas that have not seen significant development.
Opportunity Zones do not undo current tax laws. They add another layer/tool to encourage local redevelopment projects – much like Low Income Housing Tax Credits (LIHTC), New Markets Tax Credits (NMTC), Historic Tax Credits, and Renewable Energy Tax Credits.
Local Decision Making:
New Investor Class:
Designations are made by states and localities rather than Federal agencies –ensuring more local buy-in and coordination.
Opportunity Zone financing can support investments in any type of asset class – unlike 1031 like-kind exchange property.
Opportunity Zone incentives can attract new corporate and individual investors to the local Community Development arena.
Opportunity Zone incentives can attract hundreds of billions (nationally) in private sector capital to economically-distressed communities.
From an investment and compliance standpoint, Opportunity Zone financing is relatively straightforward when compared to LIHTC and NMTC.
Tax Benefits from
The tax benefits can be broken down into three areas: Capital Gain Deferral, Partial Forgiveness, and Forgiveness of Additional Gains.
Qualified Opportunity Fund (QOF) investors may defer gains realized upon the sale or exchange of property if the gain proceeds are reinvested within 180 days into a QOF.
Basis of the QOF investment increases by 10% of the deferred gain if held for 5 years from the date of reinvestment, and an additional 5% after 7 years for a total of 15%.
Any appreciation on investments in QOF that are held for at least 10 years are excluded from gross income – therefore, if held for 10 years, any gain on the investments is tax-free.