Opportunity Zones are a new concept recently enacted in the 2017 Tax Cuts and Jobs Act. The program is designed to incentivize patient capital investments in low-income communities nationwide that have been cut off from capital and experienced a lack of business growth. There are three types of tax incentives that relate to the treatment of capital gains, each of the incentives are connected to the longevity of an investor’s stake in a qualified Opportunity Fund that provides the most upside to those who hold their investment for 10 years or more.
What Makes a Opportunity Zone?
The nominated zone must either be a “low Income community” or “contiguous” to a designated low income community subject to certain statutory limitations.
Low income community: Means any population census tract if the poverty rate is at least 20 percent. Targeted populations, areas not within census tracts, low population tracts and high migration census tracts may be eligible under defined statutory guidelines.
Contiguous: Census tract directly adjacent to one or more low-income communities. The income of the desired contiguous tract has to be less than 125% of any neighboring low income tract.
Opportunity Zone Incentives
Temporary Deferral: A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of or December 31, 2026. Step-Up in Basis: For capital gains reinvested in an Opportunity Fund the basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation. Permanent Exclusion: a permanent exclusion from taxable income of capital gains from sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.