Imagine owning an asset with substantial appreciation that you can’t sell because of the capital gains taxes you would pay. Welcome to Opportunity Zones – Urban Renewal for America. Opportunity Zones created in the 2017 tax overhaul to spur economic development in low-income neighborhoods while offering investors potentially large tax breaks. The program has not received much publicity in the media.
Investors around the country are poised to funnel billions of dollars into funds targeting developments and businesses in low-income neighborhoods.
Opportunity Zones – Urban Renewal for America
The Opportunity Zone program was created to revitalize economically distressed communities. It uses private investments rather than taxpayer dollars. To stimulate private participation in the Opportunity Zone program, taxpayers who invest in Qualified Opportunity Zones are eligible to benefit from capital gains tax incentives available exclusively through the program.
To qualify for nomination as an Opportunity Zone, a census tract must meet the following low-income requirements as defined by US Internal Revenue Code Section 45D(e):
- A poverty rate of at least 20%; or
- A median family income of:
- No more than 80% of the statewide median family income for census tracts within non-metropolitan areas.
- No more than 80% of the greater statewide median family income or the overall metropolitan median family income for census tracts within metropolitan areas.
Under this program, 57% of all neighborhoods in America were up for consideration as Opportunity Zones, according to the Brookings Institute. The US Treasury assessed each nominated census tract and certified those that met the program criteria. The US Department of Treasury officially certified more than 8,700 tracts as Opportunity Zones in June 2018, constituting roughly 12% of all census tracts in the US.
Essentially, Opportunity Funds can only invest in the construction of new buildings and the substantial improvement of existing unused buildings. If an Opportunity Fund invests in the improvement of an existing building, it must invest more in the improvement of the building than it paid to buy the building. Whether the building is constructed from the ground up or improved, the development of the building must be completed within 30 months of purchase.
What’s In It For Investors?
When an investor divests an appreciated asset, such as stocks or real estate, the investor realizes a capital gain, which is a taxable event. Under the Opportunity Zone Program, if an investor reinvests a capital gain into an Opportunity Fund, they can defer the taxes until April 2027 and reduce their tax liability on that gain. Beyond that, they can also potentially receive tax-free treatment for all future appreciation earned through the fund. Together, these tax incentives can boost after-tax returns for Opportunity Fund investors:
Those who hold their Opportunity Fund investment for at least 10 years can expect to pay no capital gains taxes on any appreciation in their Opportunity Fund investment.
The first Opportunity Zone was created in Vicksburg, a city where 68 percent of the population is black or African American. And even though Flaggs is a Democrat, he did not hesitate to share the stage with Trump or to tout the success of the new program.
“As a mayor of Vicksburg and a former legislator for 25 years, I’ve never seen any piece of legislation that allows more collaboration between federal, state and local gov’t,” the Mississippi mayor Flaggs said, thanking Trump for his tax cuts and support.
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