About Opportunity Zones

What is an Opportunity Zone?

Senators Tim Scott (R-SC) and Cory Booker (D-NJ) lead the charge to approve an important provision in the Jobs act of 2017. The federal government approved a new investment tool for distressed communities, via a tax reform legislation in December 2017: The Opportunity Zones. 

The legislation is designed to spur economic development and job creation in distressed communities by making it more appealing to investors to invest in these zones. Investors that deploy funds in these zones are encouraged & incentivized to deploy and invest capital gains in to low-income communities. 

"Opportunity Funds" are the vehicle for taking advantage of this tax incentive. These funds are generally managed by investment professionals and are currently being formed for the purpose of investing directly into low-income communities designated as Opportunity Zones. Individual investors may also create, fund and self administer an Opportunity Fund via a "self-certification" process.

Opportunity Zones have no adverse effect on local or state tax revenue. The objective is to increase investment in underserved communities and improve and strengthen the economy and infrastructure. 

What Type of Investments Are Allowed?

Investment Types 

Real estate and Businesses (i.e., LLCs, corporations, partnerships, etc.) located in Opportunity Zones are generally eligible for investment. Treasury Regulations provided some more detail detail about what an investment needs to be, however, this sums it up:

Opportunity Funds may generally hold an interest in real estate located in Opportunity Zones and develop real estate properties.

- Opportunity Funds may invest in entities located in Opportunity Zones (i.e.,, start-up technology companies in business accelerators or incubators).

- Investments must meet substantial improvement requirement the details of which are set forth in the Treasury Regulations. 

To take advantage of these incentives, an Opportunity Zone fund must holds at least 90% of its assets in the Opportunity Zones. The investor must improve the subject property by 100% of the adjusted improvement value of the property at the time of purchase within a 30 month period. 

What Are The Tax Benefits? 

The tax provision provides three three main benefits to an investor that invests in these zones; 

Tax Deferral: An investor may defer current capital gains income tax current that are reinvested into an Opportunity Fund. The gains may be deferred as long as they are not yet realized for federal tax purposes. 

Basis Step-Up: An investor is allowed a step-up in the basis of any current capital gains that have been reinvested into an Opportunity Fund. The investor's basis in the original investment is increased by ten percent (10%) of the amount of the unrecognized capital gain as long as the Opportunity Fund investment is held for a minimum of five (5) years. The investor is awarded a fifteen percent (15%) step up if the investment is held for a minimum of seven (7) years. The effect of the step-up in basis is to reduce the amount of the re-invested capital gain that is subject to tax. 

Permanent Exclusion: Long term investments are encouraged and rewarded because private investors are granted a permanent exclusion of any future capital gain income realized when the asset is sold or exchanged after the investment is held for at least ten (10) years. In this case, a private investor would be allowed to exclude the entire gain an investment increases after the initial investment is made into the Opportunity Fund. 
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