Established with the Tax Cuts and Jobs Act of 2017, Opportunity Zones are low-income census tracts nominated by governors and certified by the U.S. Treasury that are intended to provide preferential tax treatment for investment.
“Opportunity Zones are built to provide significant tax advantages to investors into stock, businesses or property located in a Qualified Opportunity Zone,” says Graham Allison, CEO and co-founder of Opportunity Zone Development Group, a Clarus Partners associate.
Smart Business spoke with Allison about these innovative federal tax incentives, and how businesses, investors and communities can take full advantage of them.
Who benefits, or at least stands to benefit, from an Opportunity Zone?
Opportunity Zones were made with bipartisan support as an economic development tool to create jobs in emerging markets. They’re designed to attract some of the estimated $5 trillion in unrealized capital gains to these underserved areas. If they perform as expected, neighborhoods will benefit from added investment and job creation, and investors will benefit from significant tax incentives.
For investors, there are the following benefits:
- Upon sale of an asset, the investor defers the capital gains tax until the sale of the subsequent investment or December 31, 2026, whichever comes first.
- If the business holds the asset for five years, there is a step up in basis of 10 percent.
- If the asset is held for seven years, there is an additional step up in basis of 5 percent, before the tax payment becomes due on April 15, 2027. Essentially, an investor pays 85 percent of the original tax due up to eight years later.
- If the asset were held for at least 10 years, there would be no tax on the appreciation of the asset. While this incentive is like a 1031 Exchange for real estate, it ends the cycle of transfer of assets between like-kind property and allows an investor to realize the entire gain.
Who can invest in an Opportunity Zone and what should investors expect in return?
Investors that can participate include individuals, corporations, businesses, REITs, and estates and trusts that invest through a Qualified Opportunity Fund. A Qualified Opportunity Fund is a partnership or corporation that maintains 90 percent of its assets in a Qualified Opportunity Zone.
Investors can sell a real estate property, business or stock and reinvest it in a Qualified Opportunity Fund to acquire Qualified Opportunity Zone assets. Opportunity Zones enhance returns as investors can utilize funds they would have otherwise paid in capital gains taxes to obtain real estate cash flow, grow a business or gain dividends on stock.
The greatest benefit comes when selling the asset after 10 years as there would be no tax on the appreciation of the Qualified Opportunity Zone asset. That represents a significant tax savings on gains.
Where are the Opportunity Zones in Ohio or where are they expected to be once they’re created?
Ohio has 320 census tracts designed to promote investment in low-income areas. Ohio was permitted to submit up to 25 percent of its eligible census tracts and 73 counties contain these eligible zones. A map of eligible Opportunity Zones can be found at opportunityzonedevelopmentgroup.com.
What should the investor communities know about Opportunity Zones before committing to invest in one?
Investors should talk with their tax professional before committing to an investment in an Opportunity Zone. While the Opportunity Zone incentive is very flexible, it requires strict compliance to ensure it is actualized.
Insights Accounting is brought to you by Clarus Partners
