The Tax Cuts and Jobs Act of 2017 included a number of tax saving incentives for individuals and businesses.  Sponsored by over 100 legislators, and included in this bill, are Qualified Opportunity Zones which have created a new capital gain tax incentive for investors.  This article is part of a two part series.  This initial article will outline the basics of Opportunity Zones.    

What are Qualified Opportunity Zones?

Qualified Opportunity Zones are specific geographic areas which have been nominated by state governments and certified by the Secretary of the U.S. Treasury.  These zones are census tracts generally composed of economically distressed communities.  There are more than 8,700 Opportunity Zones located in all 50 states, Washington, DC, and 5 U.S. territories.  There are 25 Qualified Opportunity Zones located in the state of South Dakota, with 4 of those being in Pennington County.  In fact, there are Opportunity Zones located right in Rapid City!   The areas include much of downtown, north Rapid City, and the School of Mines campus.  This website has a good interactive link. 

The Internal Revenue Code defines the qualifications which are required for a geographical area to be certified as a Qualified Opportunity Zone.  Generally, these requirements include factors such as minimum poverty rates of at least 20%, maximum median family income levels of 80% of the statewide median family income amount, and proximity to another Qualified Opportunity Zone.  Based on these requirements, 57% of all neighborhoods in the U.S. were eligible to be considered as an Opportunity Zone. 

Why were Opportunity Zones Created?

Opportunity Zones were created as a means to stimulate economic growth in specific geographical areas that need it the most.  It is estimated that U.S. taxpayers hold an estimated $6.1 trillion of unrealized private gains.  By offering immediate and long term capital gain tax incentives to investors, the government is encouraging private investors to channel their dollars into economic development in these communities rather than using direct taxpayer dollars.  Opportunity Zones are designed to be less restrictive and less costly than traditional tax credit programs.

How do I Invest in an Opportunity Zone?

The vehicle for utilizing the capital gain tax incentives relating to Opportunity Zones is called a Qualified Opportunity Fund.  In order to take advantage of deferred and reduced capital gains, investors must invest their gains in Qualified Opportunity Funds.  A Qualified Opportunity Fund is a U.S. partnership or corporation that invests at least 90% of its holdings in one or more Qualified Opportunity Zones.  Opportunity Funds are restricted to investing in the following types of Qualified Opportunity Zone Property:

  • Partnership interests in businesses that operate in a Qualified Opportunity Zone
  • Stock ownership in businesses that conduct most or all of their operations within a Qualified Opportunity Zone
  • Real estate located within in a Qualified Opportunity Zone
    • New building construction
    • Substantial improvement of existing unused buildings
      • Must invest more in the improvement of the building than the purchase price
      • Building development must be completed within 30 months of purchase for both new construction and improvements

Stay tuned for my next article in which I will discuss the specifics of investing in Opportunity Funds and provide an illustrated example of how capital gains can be partially deferred and even permanently excluded.