Opportunity Zones are census tracts generally composed of economically distressed communities that qualify for the Opportunity Zone designation according to criteria outlined in 2017’s Tax Cuts and Jobs Act. Since the passage of the law, Opportunity Zones have been designated in all 50 states in the US, the District of Columbia, and five US possessions (American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the Virgin Islands). In fact, all of Puerto Rico falls into an Opportunity Zone.
Up to 25% of low-income neighborhoods that meet the income qualifications of the program (and up to 5% of non-low income tracts that meet other income and geographic requirements) in each state, district, or territory can be designated as Opportunity Zones. In states, territories, and districts with fewer than 100 census tracts, up to 25 census tracts can be designated as Opportunity Zones. Areas certified as Opportunity Zones retain their designation for ten years. More than 8,700 Qualified Opportunity Zones have already been qualified in the US and US territories.
How are Opportunity Zones Created?
Opportunity Zones are created through a nomination and designation process. Following the passage of the new tax reform, governors of US states and territories — as well as the mayor of Washington, DC — were given until April 2018 to nominate qualifying census tracts in their jurisdictions for Opportunity Zone designation. Because the Opportunity Zones are intended to develop economically depressed areas, there are restrictions on which census tracts can qualify for designation. To qualify for nomination as an Opportunity Zone, a census tract must meet the following low-income requirements as defined by US Internal Revenue Code Section 45D(e):
- A poverty rate of at least 20%; or
- A median family income of:
- No more than 80% of the statewide median family income for census tracts within non-metropolitan areas.
- No more than 80% of the greater statewide median family income or the overall metropolitan median family income for census tracts within metropolitan areas.
Up to 25% of the census tracts of each jurisdiction that met these criteria could be nominated. An additional 5% of each jurisdiction could qualify if they met a different set of income and geographic qualifications:
- A census tract that’s contiguous with a low-income Opportunity Zone; and
- A median family income of no more 125% of the median family income of the adjacent Qualified Opportunity Zone.
Under this scope, 57% of all neighborhoods in America were up for consideration as Opportunity Zones, according to the Brookings Institute. The US Treasury assessed each nominated census tract and certified those that met the legislation’s criteria. The US Department of Treasury officially certified more than 8,700 tracts as Opportunity Zones in June 2018, constituting roughly 12% of all census tracts in the US.The entire City of Buena Vista is a qualified Opportunity Zone.
Why Were Opportunity Zones Created?
Opportunity Zones and Opportunity Funds were created to stimulate private investment in Opportunity Zone communities in exchange for capital gain tax incentives. Instead of dedicating taxpayer money to developing thousands of low-income census tracts across the US, this system aims to stimulate the investment of the estimated $6.1 trillion of unrealized private gains held by US households. In exchange for investing in communities within Qualified Opportunity Zones, investors can access capital gains tax incentives both immediately and over the long term.
Unlike tax credit programs designed to encourage private investment in low-income areas through tax advantages, Opportunity Zones are less restrictive, less costly, and less reliant upon government agencies to function. Tax credit programs, such as the New Markets Tax Credit (NMTC) Program and Low Income Housing Tax Credit (LIHTC) Program, are more limited in supply and subject to annual Congressional approval and/or tax credit allocation authority. Because the tax credit system limits the number of credits issued each year, it inherently limits the number of investors who can participate, and therefore the amount of money that can be invested into the development of a community under the program.
Opportunity Zones don’t operate through a tax credit program. Instead, Opportunity Zone designation and investment are governed through two Internal Revenue Code sections. This removes any limitation on the number of Opportunity Funds that can exist, making them more the product of an entirely new IRS rule that changes the tax treatment of capital gains than the subject of a more traditionally structured tax credit program.
Unlike tax credit programs designed to stimulate private investment in low-income communities, Opportunity Funds can self-certify without the need for approval from the US Treasury Department. This means that Opportunity Funds are managed entirely in the private market with the administration of the funds falling solely on the shoulders of fund managers rather than government agencies or investors.
Most importantly, there is no cap on the amount of capital that can be invested into qualified Opportunity Zones, and hence no arbitrary limit on the extent to which Opportunity Zones and Opportunity Funds may help reshape downtrodden communities.
How Investing in Opportunity Zones Works
The designation of Opportunity Zones is designed to help spur the development of identified communities. In exchange for investing in Opportunity Zones, investors can access capital gains tax incentives available exclusively through Opportunity Zones. To access these tax benefits, investors must invest in Opportunity Zones specifically through Opportunity Funds. A qualified Opportunity Fund is a US partnership or corporation that intends to invest at least 90% of its holdings in one or more qualified Opportunity Zones.
As previously mentioned, Opportunity Funds are governed by IRC section 1400Z-2 and Opportunity Funds can self-certify to the IRS. But each Opportunity Fund is responsible for ensuring that they abide by the guidelines of regulations in order to be able to offer tax incentives.
Because Opportunity Zones are intended to stimulate positive growth within designated communities, there are restrictions on the types of investments in which an Opportunity Fund can invest. These investments are called “Qualified Opportunity Zone property,” which is defined as any one of the following:
- 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.
- Property such as real estate located within a qualified Opportunity Zone.
There are rules that govern each of these three investment options, but the rules for businesses are similar to those of the Enterprise Zone Business requirements. For property such as real estate, the rules are somewhat different. The types of real estate investments allowed under regulations are limited to ensure that the communities are improved with each investment.
Essentially, Opportunity Funds can only invest in the construction of new buildings and the substantial improvement of existing unused buildings. If an Opportunity Fund invests in the improvement of an existing building, it must invest more in the improvement of the building than it paid to buy the building. Whether the building is constructed from the ground up or improved, the development of the building must be completed within 30 months of purchase.
Where are Buena Vista Opportunity Zones?
The entire City of Buena Vista is a qualified opportunity zone. So, anywhere in Buena Vista qualifies for benefits!!