WHAT ARE OPPORTUNITY ZONES?
Opportunity Zones provide federal tax relief for capital gains invested into certain low-income locations around the United States. Through the 2017 Tax Cuts and Jobs Act, the U.S. Congress Opportunity Zone program was created to stimulate investment in economically distressed communities as designated by selected United States census tracts. States could designate up to 25 percent of low-income census tracts as Opportunity Zones. Here in Washtenaw and Livingston counties, we have Opportunity Zones located in Fowlerville, Ypsilanti, Ann Arbor, and Chelsea.
Since the Federal Opportunity Zone program was introduced, many new sources of Opportunity Zone information, investment funds, and education about the program are now available. To navigate through the complexity of the program, the latest information has been updated regarding program changes, resources, as well as a few highlights of local Opportunity Zones.
NOTE: It is recommended to consult your tax advisor for additional information and prior to making any investment decision.
WHAT TAX INCENTIVES ARE THERE TO INVEST IN AN OPPORTUNITY ZONE?
Opportunity Zone legislation provided tax incentives to reduce capital gains for investors that hold their money in a Qualified Opportunity Fund for at least five years with the greatest upside at 10 years or more. Investors must invest through a qualified Opportunity Fund to benefit from the tax incentives.
Incentives include temporary tax deferral, a step-up in basis, and permanent exclusion from taxable income. Investors must invest through a qualified Opportunity Fund in order to qualify for tax incentives.
A tax deferral applies to capital gains reinvested in an Opportunity Fund that meets specific holding period requirements. The deferred gain must be recognized prior to December 31, 2026, while meeting all requirements.
Reduction of Deferred Gains
Investments held in Qualified Opportunity Fund for at least five years by December 31, 2026, will qualify for a 10 percent reduction tax liability for the original capital gain. If the original gain has been held for seven years in a Qualified Opportunity Fund by the end of 2026, the investment would be eligible for a 15 percent reduction in tax liability for the original gain. The deferral gain program exclusion for the seven-year option would have required investment by December 31, 2019.
A permanent exclusion is available from taxable income of capital gains from the sale or exchange of an investment in a Qualified Opportunity Fund if the investment is held for at least 10 years. (Note: this exclusion applies to the gains accrued from an investment in an Opportunity Fund, not the original gains).
ARE THERE EXISTING OPPORTUNITY ZONE FUNDS?
Yes, several Opportunity Zone funds have been created. The National Council of State Housing Agencies (NCSHA), for example, has over 183 funds listed in the Opportunity Zone Fund Directory and is expected to raise $44B in Opportunity Zone investment.
WHAT PROJECTS CAN THEY SUPPORT?
The majority of qualified Opportunity Funds invest in some form of commercial real estate, including multi-family residential, student housing, mixed-use, hospitality, or other commercial development including community revitalization, affordable housing, and workforce housing.
WHAT TYPES OF INVESTMENTS ARE ALLOWED IN OPPORTUNITY ZONES?
The investment options within opportunity zones are broad, which provides potential investors with a range of options for how to best utilize the tool. Broadly, Opportunity Zone Funds can be used for real estate or running a business (partnership interest or stock) with few limitations.
Opportunity Zone Funds are private sector investment vehicles that must invest at least 90 percent of their capital in qualifying assets located in Qualified Opportunity Zone.