Opportunity Zones, created by the 2017 Tax Cuts and Jobs Act, were designed to spur investment in distressed communities through tax benefits to investors. State governors, the mayor of the District of Columbia, and chief executives of five U.S. territories nominated Opportunity Zones, and the Department of Treasury designated 8,761 zones. Opportunity Zones retain their designation for 10 years.
U.S. Senator Cory Booker (D-NJ) championed the Opportunity Zone federal tax reform legislation. New Jersey has 169 Opportunity Zones located in 75 municipalities spread over each of New Jersey’s 21 counties. Click here to read more about Opportunity Zones in New Jersey.
There are no provisions in the advanced version of the proposed regulations specifying that investments must:
benefit low-income people,
build affordable housing, or
employ low income residents.
Nor are there protections to prevent displacement of low-income people as a result of the new investments in the distressed communities.
An Opportunity Zone is composed of “low-income” census tracts that have a poverty rate of at least 20% and median family income no greater than 80% of the area median income.
A census tract that is not “low-income” may be designated as part of a qualified Opportunity Zone if it is contiguous with low income tracts that make up a qualified Opportunity Zone and it has a median household income that does not exceed 125% of the median income of the contiguous low-income census tracts that form a qualified Opportunity Zone.
Up to 5% of the census tracts may qualify under this exemption.
Opportunity Zones provide incentives for investors to reinvest unrealized capital gains. Investors can temporarily defer inclusion in gross income capital gains that are reinvested into Qualified Opportunity Funds (QOFs).
Investors can roll existing capital gains into QOFs with no up-front tax bill. If investors hold their QOF investments for five years, the basis of their original investment is increased by 10% (meaning they will only owe taxes on 90% of the rolled-over capital gains).
If investors hold for seven years, the basis increases by a further 5%. Investors can defer their original tax bill until December 31, 2026 at the latest, or until they sell their QOF Fund investments, if earlier.
In addition, investors can exclude from taxable income any capital gains on QOF investments held for at least 10 years. In other words, after settling their original tax bill, patient investors in QOFs will face no capital gains taxes on their Opportunity Zone investments.
The proposed rule covers very technically complex tax-related provisions. It discusses topics such as gains eligible for deferral, the types of tax payers eligible to elect gain deferral, attributes of included income when gain deferral ends, offsetting-positions transactions and straddles, and gains of partnerships and other pass-through entities.
The proposed regulations also provide that if at least 70% of the tangible business property owned or leased by a trade or business is qualified Opportunity Zone business property, the requirement that “substantially all” of such tangible business can be satisfied if other requirements are met. If the tangible property is a building, the proposed regulations provide that “substantial improvement” is measured based only on the basis of the building (not of the underlying land).
In addition to the proposed regulations, Treasury and the IRS issued Rev. Rule 2018-29 providing guidance on the “original use” requirement for land purchased after 2017 in qualified Opportunity Zones.