Creation of Opportunity Zones in the New Tax Law Will Spur Community Development

From Vita Nuova Member Kathy Castagna – 4/23/18

On December 22, 2017, President Trump signed the Tax Cut and Job Act, a $1.5 trillion tax cut bill, into law. The Investing in Opportunity Act is a $7.7 billion bipartisan provision that is part of the Tax Cut and Job Act. This provision seeks to bolster economically depressed areas across the United States by offering deferred taxes and significant tax breaks to those parties willing to sustain investment in low-income areas. Incentives for a broad array of investors in designated “Opportunity Zones” will deploy capital in vulnerable and underserved areas at a low risk to investors. Opportunity Zone incentives have the potential to deploy substantial capital and act as a compliment to the New Market Tax Credit program to help underserved communities promote community development projects.

The process will function as follows:

  • Governors must designate low-income community census tracts as “Opportunity Zones” that meet the
    distress criteria required for the New Market Tax Credit program. Census tracts that qualify must have
    an individual poverty rate of at least 20% and median family income that is no greater than 80% of the
    area median.
  • Investors may temporarily defer the recognition of capital gains that are invested in the Opportunity
    Zones. The Act establishes a new class of private investment vehicles called “Opportunity Funds”,
    which are investment vehicles organized as corporations or partnerships that hold at least 90% of
    their assets in opportunity zone assets.
  • Investments in Opportunity Zones or Opportunity Funds that are held for at least five years are
    eligible for capital gains tax reductions, and investments held for at least 10 years are eligible for
    capital gains exemptions.
  • As the incentives are linked to the duration of the investor’s commitment to the Opportunity Zone
    rather than an upfront subsidy, the program provides an incentive for investors to re-invest their
    capital gains in Opportunity Funds to provide patient capital for low-income communities.
  • Governors are able to designate up to 25% of the total number of low-income census tracts in a state
    as “Opportunity Zones” where investors would be encouraged to invest. Governors of each state have 90
    days from the time the tax bill was signed into law to designate these Opportunity Zones, and the U.S.
    Treasurer will have 30 days to review the suggested Opportunity Zones from every state and approve or
    deny them.

Summary of Benefits to Selected Opportunity Zones:

  • Attraction of new type of investors into a project area,
  • Expansion of capital to fund redevelopment,
  • Encourages local reinvestment in community,
  • Strengthens financial security in areas adjacent to designated tracts.

Currently the U.S. Department of Treasury and the Internal Revenue Service have designated Opportunity Zones in 15 states and 3 territories. The states include Arizona, California, Colorado, Georgia, Idaho, Kentucky, Michigan, Mississippi, Nebraska, New Jersey, Oklahoma, South Carolina, South Dakota, Vermont and Wisconsin. The territories are American Samoa, Puerto Rico and the U.S. Virgin Islands. Treasury also announced that the IRS plans to issue additional information on qualified opportunity funds, specifically to address the certification of opportunity funds, which are required to have at least 90% of fund assets invested in OZs. Other states have nominated OZs and are awaiting approval by Treasury.

To read more from the US Department of Treasury, click here.