The Opportunity Zone Program provides almost anyone that will realize capital gains from an investment an opportunity to do some good while also doing well. The purpose of this blog post is to provide a high-level overview of how the program functions1 and the benefits to the investor and others.
The Investing in Opportunity Act, otherwise known as the Opportunity Zone Program, was enacted by the Federal government in 2017 as a part of the larger Tax Cuts and Jobs Act. This new economic development tool was introduced by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) alongside Congressmen Pat Tiberi (R-Ohio) and Ron Kind (D-Wis.), with the goal of spurring economic development in distressed communities by incentivizing investment with deferred tax treatment.
Before the Opportunity Zone Program became law, a commercial real estate investor that received income from an investment would be forced to either recognize the gain and pay tax thereon, or use an existing tax shelter (such as an IRC s 1031 exchange) to temporarily avoid tax on the income. As a result of the Opportunity Zone Program, that same investor now has the option to take the income from the investment and reinvest it in a qualified Opportunity Zone. By doing so, that reinvestment will benefit from a deferred tax treatment along with a step-up in basis depending on how long the investment is held.
How does the Opportunity Zone Program work?
Opportunity Zones work by creating an avenue for investors to receive deferred tax treatment on capital gains realized from certain investments by reinvesting said gains into Qualified Opportunity Funds (QOFs)1. Although the final published regulations will control, the currently proposed regulations provide that a gain is eligible for deferral if it will be treated as a capital gain for Federal income tax purposes. Examples of qualified capital gains include gains from the sale of real estate and gains from the sale of stocks. In order to be eligible for the deferred tax treatment, all or some of the gain must be reinvested into a QOF within 180 days of the date the gain is realized. By reinvesting the gains into QOFs, investors will receive deferred tax treatment on those gains until the earlier to occur of December 31, 2026 or the date on which the QOF investment is sold or exchanged.
Depending upon the length of time the investment is held, the investor will also receive a step up in basis on the initial capital gains that they reinvested. This step-up in basis will be either 10% for a 5-year investment or 15% for a 7-year investment. If the investment is held for 10 years or more, the investor receives a 15% step-up in basis on the initial investment but will pay zero capital gains tax on any profit realized from the QOF investment when it is sold or exchanged.
Everybody Can Win.
The potential tax savings to investors are likely to activate millions of dollars of investment directed at communities that are most in need as the primary goal of this new tool is to increase economic development in historically poor and disenfranchised neighborhoods. The benefits are only available for eligible investments located in Opportunity Zones, which zones were selected by the governors of each state based on criteria that include indicators of economic distress such as extreme poverty and high unemployment. The idea is that by driving investment to these areas, new jobs will be created or retained, poverty will be reduced, and the local tax base potentially increased. Accordingly, Opportunity Zones provide a unique opportunity to direct millions in investment to economically distressed areas nationwide while allowing investors to achieve significant tax savings.
Please note that the final IRS regulations for the program remain incomplete as a hearing on proposed rulemaking scheduled for January 10, 2019 was postponed by the IRS due to the government shutdown. Nonetheless, QOFs are already being created and funded to be allocated to future transactions. Expect to see the final regulations completed and effective this year. In the meantime, a map of the designated Opportunity Zones located in the Atlanta area can be found here and a link to all designated Opportunity Zones in the country can be found by clicking here.
 Regulations have not yet been finalized by the IRS. Proposed regulations can be found here: https://www.novoco.com/sites/default/files/atoms/files/fedreg_102918.pdf
 A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in a Qualified Opportunity Zone. https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.