In an attempt to address some of the lingering questions surrounding Opportunity Zones, the Department of the Treasury recently unveiled a number of new rules and regulations designed to provide clarity to investors on the tax implications of investing in the newly designated areas. Click here to review the proposed regulations.
The concept for Opportunity Zones was established by the Tax Cut and Jobs Act of 2017, and earlier this year, the Treasury certified more than 8,700 communities nationwide as Opportunity Zones.
According to the Treasury, approximately 35 million Americans live in areas designated as Opportunity Zones. The median family income of the designated areas are 37% below the area or state median, on average, and those areas have an unemployment rate of nearly 1.6 times higher than the national average.
The program was inspired by Sean Parker (billionaire Napster co-founder) and “designed to spur economic development and job creation by encouraging long-term investments in economically distressed communities nationwide,” according to the Treasury.
The program will allow investors to reinvest their capital gains into areas that need redevelopment and job creation. Gains can come from any investment, whether that is from stocks, bonds, real estate or partnership interests.
To qualify for the Opportunity Zone tax breaks, investors must invest their capital gains in an Opportunity Fund Zone within 180 days of receiving those gains. The money cannot be invested directly into a property, and Opportunity Zone Funds must invest 90% of their capital into opportunity zone properties.
Here is how the Treasury breaks down the tax benefits of investing in an Opportunity Zone:
Investment benefits include deferral of tax on prior gains as late as 2026 if the amount of the gain is invested in an Opportunity Fund. The benefits also include tax forgiveness on gains on that investment if the investor holds the investment for at least 10 years. Opportunity Zones retain their designation for 10 years, but under the proposed regulations, investors can hold onto their investments in Qualified Opportunity Funds through 2047 without losing tax benefits.
The Treasury Secretary Steven Mnuchin believes that $100 billion in private capital will be dedicated towards creating jobs and economic development in Opportunity Zones, foster economic revitalization and promote sustainable economic growth.
The Opportunity Zone initiative or (O-Zone as its referred too) will roll out in 2019 and only time will tell just how successful this endeavor will be at the community level and not just in corporate board rooms.
What are Opportunity Zones?
Opportunity Zones are census tracts designated by state and federal governments targeted for economic development.
What is an Opportunity Fund?
An Opportunity Fund is a new investment vehicle created as part of the Tax Cuts and Jobs Act of 2017 to incentivize investment in targeted communities called Opportunity Zones.
Why invest in Opportunity Funds?
Opportunity Funds allow investors to defer federal taxes on any recent capital gains until December 31, 2026, reduce that tax payment by up to 15%, and pay as little as zero taxes on potential profits from an Opportunity Fund if the investment is held for 10 years.
Horizon Companies has put a development team in place that will focus exclusively on O-Zone developments. We have identified several markets in the southeastern region that will be our target markets for rebuilding communities through Opportunity Zone funding.
Click here to learn more about where O-Zones are located.