Federal Opportunity Zones Program
Federal Opportunity Zones
The Federal Opportunity Zone Program is a new community and economic development tool that aims to drive long-term private investment into low-income communities throughout the country.
The program was established by Congress in the Tax Cuts and Jobs Act of 2017 and encourages investors with recently realized capital gains (money made from investments) to reinvest those capital gains in local businesses, real estate, or development projects in exchange for a reduction in their tax obligations.
As the first federal community and economic development tool since the launch of the New Markets Tax Credits program, this initiative presents an unprecedented opportunity to drive long-term private investment into low-income communities.
Now, investors can take profits from unrelated investments, put them into real estate, businesses or infrastructure in an opportunity zone and benefit in a few ways: (1) delay paying taxes on capital gains by putting the money into a fund focused on opportunity zones; (2) avoid paying taxes on a portion of those original gains if they maintain their opportunity-fund investments for five to seven years; and (3) avoid paying taxes on any new gains from their opportunity-zone investments if they invest for at least 10 years.
Lima’s Vision for the Federal Opportunity Zone Program
The City of Lima is seeking to leverage the Federal Opportunity Zone Program as an important tool to support the development of jobs, affordable housing and economic vitality. Our goal is to attract opportunity-zone investments to Lima, and to encourage deals that will benefit neighborhoods and residents.
In Lima, there are 3 opportunity zones that have been grouped into districts, based on geography, existing development areas, common land uses, and other factors.
We are positioned to use this tax incentive to make an impact on some of our most underserved and disinvested neighborhoods, we are developing a prospectus to guide investors and residents on how to best leverage Opportunity Zone investments.
Frequently Asked Questions (FAQ)
What is an Opportunity Zone? An Opportunity Zone is comprised of economically distressed census tracts where new investments under certain conditions may be eligible for preferential tax treatment. Lima submitted five census tracts that qualified as Opportunity Zones for consideration to Governor John Kasich. Three tracks were chosen and received subsequent certification by the Secretary of the U.S. Treasury.
What is the purpose of Opportunity Zones? Opportunity Zones are an economic development tool, in that they are designed to spur economic development, improve access to jobs, and create wealth in distressed communities.
How do Opportunity Zones Spur Economic Development? Opportunity Zones are designed to spur economic development by providing tax benefits to investors. First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. Second, if the QOF investment is held for longer than five (5) years, there is a 10% exclusion of the deferred gain. If the QOF investment is held for longer than seven (7) years, there is a 15% exclusion of the deferred gain. Second, if the investor holds the investment in the Opportunity Fund for at least ten (10)years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold orexchanged.
What is a Qualified Opportunity Fund (QOF)? A QOF is an investment tool that is set up as either a partnership, a corporation, or limited liability company that has chosen to be treated as either a partnership or corporation for tax purposes, for investing in eligible real estate or businesses that are located in or operating in an eligible Opportunity Zone.
How does a corporation or partnership become a QOF? To qualify as a QOF, an eligible corporation or partnership must self-certify by filing IRS Form 8996 with its Federal Income Tax Return.
How do Investments in a QOF work? Assume taxpayer A sells stock and realizes a gain of $1 million on February 1, 2019,and on June 1, 2019 (within 180 days of the date of sale), A invests $1 million in a QOF. If A makes a temporary deferral election when she files her 2019 tax return, she is not required to include the $1 million of realized gain in her gross income for 2019. The deferred gain is included in the gross income on the earlier of the date on which the QOF investment is sold or December 31,2026. If the QOF investment is held for 5 years, the basis in the investment is increased by 10 percent of the amount of gain deferred. If held for 7 years,the investment’s basis is increased another 5 percent, to 15 percent of the deferred gain. Because only the gain portion of the property sale proceeds is required to be reinvested, a QOF investment will start with a basis of zero. So if Taxpayer A in the example above holds her investment in the QOF until December 31, 2026, she will recognize a gain of $850,000 ($1 million initial deferred gain, less a basis of $150,000 or 15 percent of the deferred gain). If a QOF has depreciated in value to less than the amount of the deferred gain as of the date it is sold or on December 31, 2026, the taxpayer is only required to recognize gain up to the value ofthe investment at that time. In order to take advantage of the full 7-year, 15 percent basis step up prior to recognizing the deferred gain on December 31, 2026, taxpayers will need to invest in a QOF before December 31, 2019. In addition to losing the basis step-up, the longer the taxpayer waits to defer capital gain, the shorter the period of deferral due to the hard 2026 deadline.
Additional Opportunity Zone Information & Links
- IRS FAQ
- Economic Innovation Group Fact Sheet
- Enterprise Community Partners Opportunity Zones resource page
- Local Initiatives Support Corporation (LISC) Fact Sheet
- Bloomberg Tax Fact Sheet
- Council of Development Finance Agencies Opportunity Zones resource page
- Novogradac resource center