What Are Opportunity Zones?

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Image by TMG177 via Pixabay

The new tax law changes are in full swing, and the incentives for investors and business owners to expand and reinvest in their companies and communities. One such incentive is through the newly designated Opportunity Zones. Few may realize that San Jose is home to numerous qualified Opportunity Zones, making it a desirable place for Silicon Valley and Bay Area development. Opportunity Funds are the investment vehicles through which investors can participate in the real estate investment offered by the Opportunity Zones.

The goal of the Opportunity Zone program is to encourage investment in economically distressed communities. Investment in these areas increases property values and creates jobs that lift the whole community. Unfortunately, prior to the tax law changes, the getting business to move into blighted areas often required significant local and state tax incentives that came an significant taxpayer expense. The Opportunity Zone tax incentives create an environment that encourages private investment as a way to take the burden off of taxpayers to revitalize the Opportunity Zones. Investors who choose to participate in these revitalization efforts may be eligible for capital gains tax incentives, provided certain conditions are met.

How Are Opportunity Zones Defined?

The criteria for the how Opportunity Zones are defined is found in the Investing in Opportunity Act. This legislation is couched within the Tax Cuts and Jobs Act of 2017, and it defines Opportunity Zones as census tracts within economically distressed communities. All 50 states have Opportunity Zones, although some states may have more than others or may have larger or smaller zones, depending on the needs of the community. In addition to all 50 states, Opportunity Zones can also be found in designated as US possessions, such as Puerto Rico and the Virgin Islands.

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Opportunity Zones Map by Economic Innovation Group

The reality of business planning and real estate investing is that money tends to flow into areas that already have good economic outlooks and potential return on investment. Investing in more impoverished areas can be risky, unless there are enough willing investors to clean up larges swaths of real estate and invest heavily in long-term improvements. But investing in the suburbs does not do anything to turn around communities most in need. For this reason, Opportunity Zones target lower income areas that are often overlooked for new investment. By doing so, the injection of jobs, affordable housing, and other economic stimuli into these zones can help improve long-term economic outlooks and have a positive impact communities.

How do Opportunity Funds Differ from Opportunity Zones?

The challenge, of course, is to influence individual investors to inject needed capital into these revitalization efforts in the Opportunity Zones. The remedy this, the Tax Cuts and Jobs Act of 2017 authorized the development of a new investment vehicle to direct investment to these qualified census zones. Dubbed “Opportunity Funds”, these real estate investment vehicles pool individual investments in order to directly invest in specific projects within Opportunity Zones.

While the potential tax benefits for investors in Opportunity Funds are significant, there are some stipulations in order to realize the maximum benefit. For instance, investors must hold the investment for at least 10 years in order to defer the taxes on realized capital gains that are rolled into the Opportunity Fund. Capital gains can then be deferred until December 31, 2026.

How It Works:

  1. Sell stock or another investment that has a capital gain.  Within 180 days of the sale, roll those funds into a Opportunity Fund.
  2. Investments held for 7 years can reduce capital gains taxes on the original investment by 15%.
  3. Investments held for at least 10 years can completely eliminate taxes on any gains realized from the Opportunity Fund itself.

Each tax situation is different, so consult a tax advisor, tax attorney, or accountant to learn how investment in Opportunity Funds could impact our specific situation.

What Criteria are Followed to Create Opportunity Zones?

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Image by Daniel Case via Wikimedia Commons (CC-BY-3.0)

Governors in each of the 50 states plus several US territories nominated specific census tracts to be part of the Opportunity Zone program in 2018. In order to be nominated, the census tract had to meet strict income guidelines. These guidelines limited Opportunity Zones to low-income areas, in order to fulfill the purpose of revitalizing economically depressed areas. . Some of the criteria includes:

  • A poverty rate of at least 20%; or
  • A median family income of:

Source: US Internal Revenue Code Section 45D(e) – New Markets Tax Credit

Once submitted by the governors, the US Treasury assessed each nominated area and certified those meeting the income guidelines. Only designated, qualified Opportunity Zones qualify for the generous tax benefits.

Since Opportunity Zones and Opportunity Funds are still relatively new, their financial and economic impact, both for the investors and the communities served, is not known. However, Opportunities Zones provide a significant opportunity for investors to diversify  their investment portfolios with real estate, while enjoying tangible tax benefits.


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