About Opportunity Zones
Section 13823 of the Tax Cuts and Jobs Act of 2017 establishes a new section of the Internal Revenue Code (1400Z1), which sets forth a process for the designation of Opportunity Zones and the establishment of tax incentives for investors in Opportunity Funds. The provision is designed to spur investment in low-income communities. The language included in the tax bill was originally sponsored in earlier legislation by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and Representatives Pat Tiberi (R-OH) and Ron Kind (D-WI).
The Opportunity Zone provisions:
- Designate criteria for low-income Opportunity Zones in every state and territory
- Establish a new class of private investment vehicles called Opportunity Funds
- Provide investors an incentive to re-invest their capital gains in Opportunity Funds to provide patient capital for low-income communities.
The most immediate task for Mayors is to work with their Governors to ensure their cities are included in zones nominated by the Governor to the Department of Treasury. Opportunity Zones (OZs) must consist of contiguous low-income census tracts. (A limited number of other census tracks can be included if they are contiguous to the low-income tracts.) Below are key elements of the process of OZ designation.
- Eligible census tracts must have at least 20 percent poverty rate, or median family income that does not exceed 80% of statewide median family income or, if in a metro area, the greater of 80% statewide median family income or 80% of metro area median family income.
- Governors are able to designate up to 25 percent of the total number of low-income census tracts in their state as Opportunity Zones.
- A state can have multiple or one single zone, but they must consist of low-income census
tracts, and no more than 25 percent of the total number in the state.
- Governors have 90 days upon date of enactment of the legislation to nominate eligible zones to Department of Treasury March 21, 2018. Governors can apply for a 30-day extension.
- The Department of Treasury must complete certification of Opportunity Zones within 30 days of receipt of a nomination from a Governor.
Great to discuss opportunity zones with some dedicated members of the US Conference of Mayors. Thank you for your service to this nation! 🇺🇸 pic.twitter.com/f6z1FhovT2— Steven Mnuchin (@stevenmnuchin1) September 6, 2018
How Opportunity Funds Work
- Opportunity Funds are investment vehicles that specialize in providing access to capital in low-income community Opportunity Zones, designated by the states’ governors.
- Opportunity Funds may be established by both public and private entities but would be required to meet Treasury guidelines yet to be established.
- Opportunity Funds allow investors to re-invest their capital gains from the sale of appreciated assets into Opportunity Funds in exchange for a temporary tax deferral and other benefits tied to long-term holdings. Opportunity Funds are expected to target “patient investors” in exchange for the following incentives:
- Deferral of capital gains tax on the original investment into an Opportunity Fund
- If the investment is held for the full ten-year period, only 85% of the original, deferred capital gain tax must be paid at the end of the period.
- Any capital gain realized by investment in the Fund itself, and held for the ten-year term, will be fully exempt from any capital gains taxes.
- Opportunity Funds are self-designating, requiring no competitive selection by either a Governor or the US Treasury. While the Fund’s investment must be made in Opportunity Zones, the Funds’ objective will be to maximize return for their investors.
- For the Opportunity Fund to work, its managers will seek investments in Opportunity Zones that can attract viable projects that increase in value over the life of the fund.
The most immediate opportunity for Mayors is to engage their Governors to select parts of their cities as Opportunity Zones.
Once zones are designated, Mayors have several opportunities to lead by:
- Identifying viable existing or new projects and investment opportunities to market and recruit investment from qualified Opportunity Zones.
- Convening community and business leaders to develop strategic plans for zones that couple public project priorities with the private investment projects to streamline and coordinate market growth in low-income areas.
- Creating their own opportunity funds managed by city or in a public-private partnership
with an existing national or local financial institution.
- Letter to Acting Commissioner Kautter on the issuance of guidelines (August 23, 2018)
- Guidelines for Opportunity Zones from the Department of the Treasury
- Department of Treasury Press Release: “Treasury, IRS Issue Guidance On Opportunity Zones To Spur Private Investment In Distressed Communities”
- Opportunity Zones mapping tool
For More Information
If you have any questions about opportunity zones are want to get more information, please contact Dave Gatton at 202-293-7330.