The fundamental goal of the Opportunity Zone Program is to stimulate private investment in disadvantaged areas.
In partnership with Michael J. Andreanna of Pullman & Comley LLC, we are pleased to share with our clients and readers new federal legislation, the Opportunity Zone Program, crafted to encourage private investment into low-income communities across the country.
What is the Opportunity Zone Program?
The Opportunity Zone Program provides federal tax incentives for private entities to reinvest capital gains into Opportunity Funds. These funds are then used to invest in low-income communities throughout the country. The fundamental goal of the Opportunity Zone Program is to stimulate private investment in disadvantaged areas.
What are Opportunity Funds?
Opportunity Funds are simply a financial mechanism used to move private reinvestment of capital gains into funding programs for low-income communities.
What are Opportunity Zones?
Opportunity Zones are considered on a census tract basis, and Opportunity Zone designations will be comprised of low-income community census tracts. Designated Opportunity Zones have not yet been decided, however, there is an interactive map, found here, that displays all census tracts eligible for Opportunity Zone designation. It is up to the governor of each state to nominate up to 25% of the state’s low-income community census tracts as potential Opportunity Zones. To qualify as a low-income community census tract, it must have an individual poverty rate of at least 20% and a median family income of up to 80% percent of the area median.
Governors have until March 21, 2018 to nominate local census tracts for Opportunity Zone designation. However, governors do have the ability to request a 30-day nomination extension, pushing the due date to April 20, 2018. These nominations will be reviewed by the U.S. Treasury Secretary within 30 days of submittal.
What are the tax incentives?
There are three tax incentives offered to encourage investment in the Opportunity Zone Funds:
- Temporary deferral of inclusion in taxable income for capital gains that have been invested in the Opportunity Zone Fund.
- Step-up in basis for capital gains that have been invested in the Opportunity Zone Fund. This step-up basis is a readjustment in the value of capital gains that are reinvested in the Fund. For this program, the step-up basis is increased by 10%, if the Fund investment is held by the taxpayer for 5+ years, then increased by an additional 5% if held by the taxpayer for 7+ years. This results in excluding up to 15% of the original gain from taxation.
- Permanent exclusion from taxable income of capital gains from sale or exchange of investing in Opportunity Fund, if the investment is held by the taxpayer for 10+ years. Only gains accrued after investment in the Fund will fall under this exclusion.
For more information about how these tax incentives work, please read Economic Innovation Group’s fact sheet.