What is an Opportunity Zone?
The Tax Cuts and Jobs Act of 2017 established a new economic development program called Opportunity Zones designed to encourage long-term private investments in low-income communities. The program provides a federal tax incentive for taxpayers who reinvest unrealized capital gains into “Opportunity Funds,” which are specialized vehicles dedicated to investing in low-income areas called “Opportunity Zones.”
The zones themselves are to be comprised of Low-Income Community Census tracts and designated by governors in every state and territory. The program has the potential to direct private capital toward distressed communities and serve as a catalyst for long-term, inclusive economic development. This may include downtown revitalization, workforce development, affordable housing, infrastructure, and business startup and expansion.
Tax Benefits to Investing in Opportunity Zones
For an investor to realize the tax benefits of investing in Opportunity Zones, an investor's capital gains must be invested in a Qualified Opportunity Fund with 180 days of the sale or exchange that generated the gains. Investors are then eligible to defer the tax on their capital gains until the earlier of: the date the Opportunity Fund investment is sold or December 31, 2026.
The capital gains invested in a Qualified Opportunity Fund are eligible for partial tax forgiveness if the investment is held in a Qualified Opportunity Fund for at least 5 years. After 5 years, only 90 percent of the original gain is taxed. If the investment is held for 7 years, only 85 percent of the original gain is taxed. If an investment in a Qualified Opportunity Fund is held for 10 years, any tax on the appreciation of that investment is forgiven. Learn more: https://www.cdfa.net/cdfa/cdfaweb.nsf/resourcecenters/OZ.html.
What are Opportunity Funds?
Opportunity Funds are Treasury-certified investment vehicles, that deploy capital into Opportunity Zones. Opportunity Funds are required to hold at least 90 percent of their assets in an Opportunity Zone. Learn more: https://www.cdfa.net/cdfa/cdfaweb.nsf/resourcecenters/OZ.html.