What’s the Deal with Opportunity Zones?

Opportunity Zones, created as part of the federal Tax Cuts and Jobs Act of 2017,[1] encourage private investors to “roll” their capital gains into developing low-income areas. “This new tool provides tax incentives, including a temporary deferral on capital gains taxes, when investors reinvest those gains in qualified Opportunity Funds.  The funds must in turn invest in low-income communities from designated census tracts, called Opportunity Zones.”[2]

Opportunity zones strive to develop a variety of income-producing properties in low-income areas, ranging from affordable housing to government facilities to private residential/commercial buildings.  However, properties categorized as liquor stores, golf courses, gambling facilities, massage parlors, and other similar-use properties are ineligible under the program.[3]

How Does One become an Investor (Opportunity Fund)?

There is currently no application process because this is a private sector investment and thus, interested and eligible investors must be registered as a partnership or corporation to participate in the program.[4]  The investor must comply with all reporting requirements in addition to all applicable structural codes.[5]  The investor must also own the property lying in the opportunity zone and must invest 90% of its fund into the opportunity zone.[6]

Investors must self-certify prior to any qualifiable development by filing Form 8996, Qualified Opportunity Fund, with their federal income tax return.[7]  Although the IRS has released a draft of the form, it has not yet been finalized.[8]  Upon its certification as a Qualified Opportunity Fund, investors may proceed.

Investors may select an opportunity zone in which to develop an income-producing property based on economic indicators, discussions, and “marketing” from residents within a particular community.

Federal Tax Incentives:

The longer an investment is held, the greater the federal tax benefit to the investor.[9]  If the investment in the Opportunity Fund is held for at least 5 years, the investor will only pay taxes on 90% of its capital gains.[10] If the taxpayer holds the investment for at least 7 years:  85% of its capital gains; an investment held for at least 10 years may be eligible for permanent exclusion from taxable income of capital gains (from the sale or exchange of an investment).[11]  

Further Guidance and Rulemaking is Needed:

The United States Department of Treasury has begun making rules and guidelines meant to clarify how funds will be distributed and ensure that investors are in proper compliance.[12] Since the program is at such an early stage, and because it is overseen by the federal government, it is nearly impossible to determine the success of opportunity zone projects.[13]  Nevertheless, as part of its recommendations, the Department of Treasury will set forth guidelines to assist local governments in setting up their involvement in oversight.

[1] Florida Department of Economic Opportunity. Opportunity Zones Program, 18 Dec. 2018. http://www.floridajobs.org/business-growth-and-partnerships/for-businesses-and-entrepreneurs/business-resource/opportunity-zones.

[2] Id.

[3] Deirdra Funcheon, South Florida Investors Get In Position For Opportunity Zones, 5 Sept. 2018. Bisnow. https://www.bisnow.com/south-florida/news/land/opportunity-zones-florida-92435; The Department of Economic Opportunity (DOE) selects zones based on the U.S. Census tract data and other economic analyses such as population density, poverty level, and unemployment. Economists also consider input from communities’ residents, developers, investors, nonprofits, and city and county governments

[4] Id. (“An LLC that chooses to be treated either as a partnership or corporation for federal tax purposes can organize as a Qualified Opportunity Fund.”).

[5] Florida Department of Economic Opportunity. Florida Opportunity Zones, as presented by Erin Gillespie, Deputy Chief of Staff. Miami-Dade County Board of County Commissioners Meeting December 14, 2018.

[6] Florida Department of Economic Opportunity supra note 1.

[7] Internal Revenue Service. Opportunity Zones Frequently Asked Questions, 18 Dec. 2018. https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

[8] See Form 8996: https://www.irs.gov/pub/irs-dft/f8996–dft.pdf; see also Instructions: https://www.irs.gov/pub/irs-dft/i8996–dft.pdf.

[9] Id.; ([Investors] can get the tax benefits, even if you don’t live, work or have a business in an Opportunity Zone. All you need to do is invest a recognized gain in a Qualified Opportunity Fund and elect to defer the tax on that gain.”).

[10] Economic Innovation Group. The Opportunity Zones program offers three tax incentives for investing in low-income communities through a qualified Opportunity Fund, 18 Dec. 2018. https://eig.org/wp-content/uploads/2018/02/Opportunity-Zones-Fact-Sheet.pdf

[11] Id.;(“This exclusion only applies to gains accrued after an investment in an Opportunity Fund.”).

[12] Florida Department of Economic Opportunity supra note 7.

[13] Id.

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Luis is an experienced procurement lawyer and Miami lobbyist serving elected officials, businesses, international clients, and trade associations. He regularly appears before local and state government in order to advance complex objectives for clients against competing interests. He has weathered various competitive processes in Florida including Home Rule Charter Amendments, Recalls, Local, State and Federal campaigns.