OPPORTUNITY ZONE TAX BENEFITS
I have personally been raised in one of those distressed communities and I will tell you that the potential in those Opportunity Zones is incredibly high.”
Opportunity zones are designed to encourage economic develop- ment in places where it’s lacking. The usual attractions are insuffi- cient to lure investors and entre- preneurs; as a result communities wither and become less attractive. To break the cycle, more capital and jobs are needed. And, how do you generate more O-zone invest- ment? With tax benefits. You can’t just plop money into an Opportunity Zone and get a juicy write-off. The proposed rules – which are subject to change with publication of the final Treasury regulations as soon as early sum- mer – carve out a specific process. In basic terms, an O-zone invest- ment works like this. You have capital gains from in- vestments in stock, real estate, etc. You can pay the tax or – within 180 days from the date of a sale – you can put the gain into a Qualified Opportunity Fund (QOF). With a QOF, you can defer the tax. Better yet, in some cases you may be able to avoid capital gains taxes altogether. Brett Theodos, who directs the Community Economic Develop- ment Hub with the Urban Institute, divides potential O-zone tax bene- fits into three categories. “Permanent exclusion of tax- able income on new gains. For investments held for at least 10 years, investors pay no taxes on capital gains produced through their investment in Opportunity Funds (the investment vehicles that make investments in Op- portunity Zones). “Basis step-up of capital gains invested. For capital gains placed in Opportunity Funds for
SEN. TIM SCOTT
ment is increased 10 percent. If invested for at least seven years, investors’ basis on the original investment is increased 15 percent. “Temporary deferral of cap- ital gains. Investors can place existing assets with accumulated capital gains into Opportunity Funds. Those capital gains are not taxed until the end of 2026 or when the asset is disposed of.” Steve Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center and a tax attorney, says Opportunity Zone investments offer three advantages when com- pared with past efforts such as Empowerment Zones and Renewal Communities. First, says Rosenthal, “a tax- payer need only reinvest gains, not the entire proceeds from a sale of assets. The capital gains provisions of the earlier programs required a taxpayer to reinvest all sales proceeds, not just profits.” Second, “the other programs permitted a taxpayer to defer gains from the sale of assets within a qualified zone, but not defer gains from the sale of assets outside the zone.” Third, “syndicators may organize and market the opportunity funds, which can invest more expansive- ly than earlier programs could.” Rosenthal explains that while there are 8,700 Opportunity Zones there
were only 40 empowerment zones as well as just 40 renewal communities.
OPPORTUNITY FUNDS Even if you have capital gains that you want to drop into an Opportunity Zone, you can’t simply go out and buy a building or start a project in a particular census tract. Instead, you must invest through a Qualified Opportunity Fund (QOF). According to the IRS, a quali- fied opportunity fund (QOF) “is an investment vehicle organized as a corporation or a partnership for the purpose of investing in qual- ified opportunity zone property (other than another QOF).” A QOF must maintain a number of stan- dards to be within the regulations. • At least 90% of QOF assets must be represented by qualified opportunity zone properties. A billion-dollar fund armed with expansive tax breaks can invest $100 million anywhere, including far from designated census tracts. • “Substantially all” of the tangi- ble property owned or leased by a qualified opportunity trade or business must be within an Opportunity Zone. “Substantial- ly all” means 70% according to the interim regulations.
at least five years, investors’ basis on the original invest-
• Based on all the facts and
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