There is a lot of information out there that is circulating around the new opportunity zone program. It is important to take a moment and explain this program and hopefully offer a quick reference to our clients, and others that may be interested. Before we dive into the details, let’s clarify a couple of terms that will be used frequently throughout this article.
Opportunity Funds can be described as an investment vehicle that is set up solely for investing in qualifying property within an opportunity zone. The longer those capital gains are held in this vehicle, the larger the tax breaks will be for the taxpayer.
Opportunity Zones, or O-zones, are a new community development program established by Congress in the Tax Cuts and Jobs Act of 2017 and are in place to encourage long-term investments in low income areas that are classified as “distressed.” This program incentivizes long term investing by allowing the percentage of the tax breaks on capital gains to be in direct relation to the time in which the capital is held. Essentially, investors become invested, because their success becomes community based, rather than project based. The O-Zone Program focuses on capital gain taxes paid on profits made when selling investments such as real estate or stocks, which are normally taxed at 20 percent plus 3.8 percent surtax. Investors who roll their capital gains into an Opportunity Fund invested in the designated zones will be able to defer and reduce tax payments and avoid some taxes altogether.
As a design and architecture firm, YWS can help coordinate projects that make sense, but our clients aren’t always aware of the benefits that are applicable. Our hope is to educate individuals that are interested in developing and/or renovating existing properties, while helping to inform them of all available options that help their investments “pencil out.”
The concept was originally developed by Economic Innovation Group (EIG) in 2015 in an effort to address poverty and certain communities that are seemingly “left behind.” Since its infancy stages of ideas and solutions, this program has been adopted by investors, economists, entrepreneurs, community developers, and others alike. The Opportunity Zone Act was drafted in 2016, and then introduced in February of 2017 – with the primary goal of encouraging private capital investment in economically distressed areas. In April of 2018, the first release of opportunity zones was announced, covering 18 states. By summer of 2018, the O-Zone fund certifications were released, and must be filed with the certified taxpayer’s 2018 tax return.
“Too many communities in our great nation feel passed over by economic growth and forgotten by our political leaders. We need a new formula for the public and private sectors to work together to generate new investments, new businesses, and new good paying jobs in places that have fallen behind. The Investing in Opportunity Act will harness much-needed private capital to flow to more American communities and empower state and local leaders to build a more prosperous future. Americans of all political stripes should unite behind this critical priority, and its congressional leaders — Senators Scott and Booker and Congressmen Tiberi and Kind — demonstrate there is hope for the type of bipartisan action that can provide a better future for millions of Americans.”
How do tax payers benefit?
When a taxpayer holds an investment in what is called an Opportunity Fund (O-Fund) with a qualifying parcel located in a designated Opportunity Zone, they can defer and potentially reduce taxation on their capital gains. There are three tax incentive benefits with this program that include: 1) Temporary deferral of capital gain, 2) Partial reduction of deferred gain and 3) Full forgiveness of additional gain.
The deferred gain is the aggregate amount invested that does not exceed the amount of gain generated. Temporary deferral of capital gain is applicable to any capital gain from the sale, or exchange, of any property to an unrelated person. There are six trillion in funds available for potential eligible capital funds.
Partial Reduction of Deferred Gain is available in an effort for long term investment incentive. The taxpayer has an initial basis in the O-Fund of zero. If held for five years, the tax basis is increased by ten percent of the amount of the deferred gain. If held for 7 years, the tax basis in the O-Fund is increased by an additional five percent of the amount of the deferred gain.
The taxpayer is eligible for full forgiveness of additional gain when the interest in the O-fund is held for ten years and one day, thus encouraging the long term investment portion for this Act.
In a recent presentation, offered by Snell & Wilmer, you can view this visual graph for a better understanding.
Where are these zones located?
The O-zones are located in areas that are deemed as distressed. You can find a national map of the exact locations here.
What business can qualify?
It may be better to discuss which businesses cannot qualify, as that list is much shorter. A qualifying investment must be outlined in a location that is deemed within the Opportunity Zone grid, the taxpayer can then do a self-certification form and supply it with their 2018 tax return.
Businesses that do not qualify are those that are considered to be a “sin business.” These include golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks (or other gambling facilities), and any store in which the principal business is the sale of alcoholic beverages to be consumed off of the premises.
What needs does the O-Zone Act Address for America?
In a system where we are seeing the middle class show a significant decrease and where poverty is showing a rapid increase, the Opportunity Zone Act creates a stimulus effect for areas in our nation that are in distress.
As the honorable Andrew Young stated: “Too many communities in our great nation feel passed over by economic growth and forgotten by our political leaders. We need a new formula for the public and private sectors to work together to generate new investments, new businesses, and new good paying jobs in places that have fallen behind. The Investing in Opportunity Act will harness much-needed private capital to flow to more American communities and empower state and local leaders to build a more prosperous future. Americans of all political stripes should unite behind this critical priority, and its congressional leaders — Senators Scott and Booker and Congressmen Tiberi and Kind — demonstrate there is hope for the type of bipartisan action that can provide a better future for millions of Americans.” (Chair of the Andrew J. Young Foundation, former U.S. Ambassador to the United Nations, and former U.S. Congressman).
Did you know?
One last piece of valuable information is that you can cross reference the location of your investment with the New Market Tax Credit zones. If your parcel falls in both zones, which is highly probable given the overlap, you can qualify for both – concurrently.
Over the next few months, the Treasury Department and the Internal Revenue Service will be providing additional details on this program. We intend to follow watch very closely and inform our clients as new information becomes available. One of the most important things that we can do for our clients is to help educate them and provide them with the tools necessary for optimal success. If you have any questions on new developments in these Opportunity Zones, YWS is positioning our team to be a valuable resource and business partner.
For a full list of frequently asked questions, and other valuable resources regarding the Opportunity Zone Act, please visit here.
About YWS: YWS Design & Architecture is an international design and architecture firm specializing in leisure environments in hospitality, gaming, retail, dining and entertainment venues. With its core services of architecture and interior design, YWS is leading the leisure design industry, grounding every project in consumer/market insights and brand conscious design. Founded in 2001 in Las Vegas, NV – YWS’ projects span the globe and include international resort destinations, local gaming venues and unique entertainment experiences.