By Aaron Clapper, GOPC Project Manager
Opportunity Zones were established out of the federal Tax Cuts and Jobs Act in December 2017 as a way to spur investment in low-income census tracts – many of which have not seen significant investment following the Great Recession recovery. In total, Ohio has 320 designated census tracts in 73 counties throughout the state. These census tracts will be designated Opportunity Zones until December 31, 2028. A mapping for Ohio’s designated Opportunity Zones can be found on ODSA’s website.
Treasury/IRS are scheduled to finalize regulations within Q1 of 2019, which will most likely spur Opportunity Zone activity by answering investor-related questions. Therefore, communities should be prepared to attract investment into their designated Zones.
Below, please find a FAQ prepared by Greater Ohio as a recap for how investing may look in Opportunity Zones. Greater Ohio has written other blog posts, which can be accessed here.
How do Opportunity Zones attract investors?
Individuals and entities facing capital gains taxes can defer their capital gains in a Qualified Opportunity Fund that invests in a designated Zone. The Opportunity Zones program allows for:
Temporary deferral on prior gains invested in a Qualified Opportunity Fund (QOF) until December 31, 2026 (or the date when the investment in the QOF is sold or exchanged prior to December 31, 2026). The investor has 180 days to invest in a QOF from the date the capital gain is recognized.
Reduction in taxes owed on prior gains when the investment is held in the QOF for five years (10% reduction) or seven years (15% reduction). For an investor to receive the 15% reduction on prior capital gains, investments must be made by December 31, 2019 (seven years prior to deferred gains having to be recognized per the federal law).
Exclusion of tax liability on new capital gains if an investment is held in a QOF for at least 10 years. It is calculated that there are more than $5 trillion in unrecognized capital gains in the United States.
For the greatest tax benefit to investors, realized capital gains must be invested in Opportunity Funds by December 31, 2019 (to ensure the gains are held in an Opportunity Fund for seven years, thus the investor yields a 15% reduction of taxes owed on prior gains).
What is a Qualified Opportunity Fund (QOF)?
Individuals or entities place their capital gains into a Qualified Opportunity Fund (QOF).
A QOF may be set up as a partnership or corporation. Eligible taxpayers can become a QOF through self-certification and completion of a form through the IRS. To maintain status as a QOF, 90% of its assets must be in qualifying Opportunity Zones property, which will be tested at 6-month increments.
Full guidance has not been issued by Treasury on this matter.
What is Qualified Opportunity Zone (QOZ) Property?
QOZ property includes land, buildings, and other physical assets within designated zones. QOZ Property also refers to qualified opportunity zone stock and partnership interest. To qualify as Opportunity Zone Property, the acquisition must occur after December 31, 2017.
A Fund may invest in new-build property. As well, a Fund may acquire property within the Opportunity Zone, and qualify for tax incentives if substantial improvement is made to the property over a 30-month period. “Substantial” has been designated as doubling the value of the property.
How does an Opportunity Zone attract Funds?
Economic development entities across the country are establishing prospectuses or “pitch books” of potential real estate within their footprint that a Fund might invest in. Zone stakeholders must attract Opportunity Funds. Some communities are establishing Funds on behalf of priority projects and soliciting investments from local impact investors while also pitching projects on the open market.
Zones with clear development/redevelopment plans in place are most likely to attract investment—investors will want to invest in places where the timelines for projects are known and additional partners on a project (such as local governments, nonprofit business developers, etc.) are identified. A ten-year investment (if made by December 31, 2019) will yield the greatest benefit for an investor who invests in an Opportunity Fund. Communities that can exemplify a return to the investor after a 10-year investment are most likely to attract investment.
It is important to note that investment is not guaranteed in all Opportunity Zones. Communities with designated Opportunity Zones should convene conversation among public and private stakeholders, as well as anchor institutions (hospitals, educational institutions, community foundations, etc.) to effectively develop a prospectus/”blueprint” for attracting investment.
When will the final guidelines be released?
The United States Treasury and IRS issued additional proposed guidelines in October 2018, with a window to accept comments and feedback. A public hearing scheduled for January 2019 was postponed due to the government shutdown; the hearing has been rescheduled for February 14th at 10am. This hearing should answer nearly 150 questions submitted to the IRS/Treasury regarding investing in Qualified Opportunity Funds.