Through the Tax Cuts and Jobs Act of 2017, the U.S. government will be offering taxpayers certain incentives designed to encourage long-term investments in distressed communities and government partitioned low-income areas across the country. These areas, called Opportunity Zones, are designated by the governor of each state and could literally be right in your surrounding area or next door to where you live.
If done correctly, investments in Opportunity Zones have the potential to pull millions of Americans out of poverty and generate both financial and social returns for investors. The 2017 Distressed Community Index (DCI) reports that 52.3 million Americans currently live in economically distressed communities with more than a quarter of those residents at or below poverty levels. This means that one in six Americans could have a chance at a better life that ultimately benefits future generations. Sounds good, right?
So how do these incentives work? According to a press release issued by the U.S. Department of the Treasury and the Internal Revenue Service (IRS), investors can defer tax on prior capital gains up until December 31, 2026 — as long as those gains are reinvested into Qualified Opportunity Zones. These investments are pooled into certified investment vehicles called Opportunity Zone Funds, which are required to have at least 90% of their assets invested in these zones.
If an investor holds the O-Zone investment for five to seven or more years, they will benefit from an improved “stepped up basis” — as much as 15% for investments held for seven-plus years. Should an investor hold their stake in said fund for 10-plus years, they would then benefit from not only the 15% step-up in basis but also from a permanent exclusion of all gains accrued after investing in the O-Fund. This is a significant incentive that should prove to be transformative for these communities and lucrative for investors.
Opportunity Zones are determined by the states and approved by the government. However, governors are limited in their selections and can only name 25% of their state’s low-income areas as Opportunity Zones, which then hold the designation for 10 years. As of June 14, 2018, submissions have been approved…