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Congress Creates Opportunity Zone Program
Established by the Tax Cuts and Jobs Act of 2017, Congress has created a new community development program that encourages long-term investments in low-income urban and rural communities. The Opportunity Zone Program provides tax incentives for investors to re-invest unrealized capital gains into Opportunity Funds. Opportunity Funds are private sector investment vehicles that invest at least 90 percent of their capital in Opportunity Zones. This new program has the potential to be an important, viable program for housing and community development agencies.
Governors for all U.S. states and territories, along with the mayor of the District of Columbia, are allowed to identify 25 percent of the total number of low-income census tracts in their state, territory, or federal district as an Opportunity Zone. If the number of low-income tracts in a state is less than 100, then a total of 25 qualifying tracts may be designated. Governors may choose to nominate fewer census tracts in order to focus greater attention on targeted locales. Zones can be as small as a single census tract or a much larger grouping of contiguous tracts. Designations remain in effect for 10 years.
States must conform to the Low-Income Community federal standard as a baseline for zone designations but are free to establish additional criteria to reflect local needs and priorities. Low-Income Community census tracts are generally defined in Section 45D(e) of the tax code as tracts in which the poverty rate is at least 20 percent; tracts in which the median family income does not exceed 80 percent of the statewide median family income if located outside of a metropolitan area; or tracts in which the median family income does not exceed 80 percent of the statewide median family income or the metropolitan area median family income, whichever is higher. Governors are permitted to substitute a small percentage of non-low-income census tracts in their nominations, as long as the tracts are contiguous with other nominated low-income tracts and the median family income does not exceed 125 percent of the adjacent qualifying tract. Not more than 5 percent of the total number of designated tracts in a state can qualify under this criterion.
The Opportunity Zone program includes tax incentives to encourage investment. The program includes a temporary tax deferral for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026. Also included is a step-up in basis for capital gains reinvested in an Opportunity Fund. The basis of the original investment is increased by 10 percent if the investment in the qualified opportunity zone fund is held by the taxpayer for at least 5 years, or 15 percent if held for at least 7 years. As such, investors can exclude up to 15 percent of the original gain from taxation. Lastly, investors receive a permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years. This exclusion applies to the gains accrued from an investment in an Opportunity Fund, not the original gains.
Chief Executives have until March 22, 2018 to identify their Opportunity Zones to the Treasury Department. Treasury will then be tasked with creating the regulations needed to administer the program. This will include a public comment period once the proposed rule is released.
Feb 15 2018