Now that the rhetoric and the debate over passage of the federal tax bill have subsided, one component of that legislation is getting lots of attention. That would be “Opportunity Zones.”
Last month, the U.S. Department of the Treasury approved the final round selection efforts for designated opportunity zones. This new program allows investors to avoid capital gains tax by socking away profits by investing opportunity funds in designated zones throughout the country.
To qualify for tax benefits, at least 90 percent of the assets in opportunity funds must be invested into a low-income area which has been designated by the federal government. The zones represent areas in need of infrastructure and real estate investment. The goal is to encourage the free market to help these distressed areas by providing funding.
The program lets investors avoid the usual tax on capital gains if the profits are allocated to opportunity zones between now and 2026. Other incentives kick in if the investments are held for at least 10 years.
Companies can receive as much as a 15 percent tax break if they stick with an opportunity zone investment for at least seven years. This program is similar to one created by President Clinton in 1994 which set up empowerment zones, but that program has since expired.
A census tract is used to designate a region as low-income thereby creating an opportunity zone. At least 20 percent or more of the region’s households must fall below the poverty line, or the median family income in the tract must be below 80 percent of the statewide median income. Florida has 427 of the 8,700 low-income census tracts nationwide designated as opportunity zones.
The Treasury Department hasn’t yet issued guidelines on exactly how the program will operate or what rules the investments must follow, but firms and investors are already positioning themselves to use this new tax-avoidance option. That pleases public officials in these regions of the country.
The Joint Committee on Taxation estimates the program will cost the government approximately $7.7 billion between 2018 and 2022.
According to the Economic Innovation Group, after 10 years an investor could see an added $44 for every $100 of capital gains reinvested into an opportunity zones program. Currently, there is no limit on the potential tax benefits for investors and there is no requirement for measuring the program’s effectiveness, such as examining which investments in each area use the new incentive.
Here’s one example – a West Coast-based nonprofit is considering a $500 million opportunity zone investment to finance affordable housing. The Los Angeles development includes housing, a community center with a swimming pool and offices for college prep and job training programs.
Another example – a Phoenix-based private equity firm is raising $200 million for an opportunity zone investment which will include three Phoenix-area projects: 81 single-family townhomes with a swimming pool and clubhouse and a 90-unit apartment complex near Arizona State University’s campus in Tempe.
Finally, other types of investments could resemble this one in Miami’s Little Haiti. An Arkansas-based bank is spearheading a redevelopment project that includes a $1.3 billion mixed-use entertainment center that will be surrounded by as many as 20 buildings and a 15,000-square-foot innovation center that will be home to new business startups.
Opportunity zones are one example of how government is encouraging public-private collaborations. It is definitely worth the time it will take to get familiar with this new program.