Qualified Opportunity Zones in the Tax Cuts and Job Act of 2017
One of the few new increases for community development established by the tax bill is an incentive to invest private capital in low-income communities. The bill created a process to designate certain low-income areas as “qualified opportunity zones.” The tax incentives provided to encourage investment in these zones are (1) deferral of tax on capital gains that are reinvested in a qualified opportunity fund, and (2) no tax on the capital gains from investments in these funds, if the investment in the fund is held for at least 10 years.
If the taxpayer owns the qualified opportunity fund investment for at least five years, the taxpayer will recognize only 90% of the original gain, at most. If the investment is held for seven years, then only 85% of the original gain will be recognized.
The program is similar to the New Markets Tax Credit program and uses the same eligibility criteria for determining low-income opportunity zones. Investors are encouraged to pool their resources into “Opportunity Funds.” Fund managers will deploy capital in areas that need redevelopment eligible for investment and renewal.
Opportunity Zones are listed as “low income” and designated by census tract. However, state identification of communities is ley to the Act. State governors are able to nominate up to 25 percent of all tracts within the state as qualified opportunity zones. A map of eligible communities is available.
The nominations are to be submitted on or before March 22 (or April 21 if an extension granted) and the Secretary of the Treasury has the opportunity to certify the nomination and designate the tracts. It is time now to talk to your governor about the communities he sould nominate.