Opportunity Zones

Opportunity Zones are designed to incentivize new equity investments in low-income communities nationwide. All of the underlying incentives relate to the tax treatment of capital gains, and all are tied to the longevity of an investor’s stake in a qualified Opportunity Fund. There are three core tax incentives:

Temporary deferral: A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the Opportunity Zone investment is disposed of or December 31, 2026.

Step-up in basis: A step-up in basis for the deferred capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original deferred gain from taxation.

Permanent exclusion: A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued on investments made through an Opportunity Fund. There is no permanent exclusion possible for the initially deferred gain.

For a thorough overview and analysis of the benefits of Opportunity Zones investment, see EIG’s Opportunity Zones Fact Sheet.

A mapping tool is available on our website, and the Treasury Department’s CDFI Fund provides a similar tool and sortable list of certified Opportunity Zone census tracts. Zone designations were certified in Spring 2018 and will remain in effect until December 31, 2028. Any qualifying investment made through a qualifying Opportunity Fund into a qualifying Opportunity Zone will be eligible for the applicable tax benefits through that date. There are currently no policy mechanisms to add, subtract, or change Opportunity Zone census tracts during the life of the provision.

Low-income community census tracts, defined in Section 45D of the Internal Revenue Code, are the building blocks of Opportunity Zones. Eligible low-income census tracts had either poverty rates of at least 20 percent or median family incomes no greater than 80 percent of their surrounding area’s, according to the U.S. Census Bureau’s 2011-2015 American Community Survey.

The governor or chief executive of every U.S. state and territory nominated up to 25 percent of their low-income census tracts to be certified by the Secretary of the Treasury as Opportunity Zones. Eligibility was limited to only a portion of each state’s low-income census tracts in order to concentrate capital and increase the likelihood of meaningful economic development taking root in zones. Governors were given discretion to include moderate-income census tracts adjacent to nominated qualifying low-income ones for up to 5 percent of their nominations in order to create coherent economic zones and account for local priorities or on-the-ground idiosyncracies.

More information on the designation process and a statistical overview of designated tracts can be found here.

A qualified Opportunity Fund is any investment vehicle organized as a corporation or partnership with the specific purpose of investing in Opportunity Zone assets. The private sector is responsible for establishing Opportunity Funds.

The statute allows for broad participation in the creation of Opportunity Funds with the goal of drawing a wide array of investors to support the broad variety of needs in low income communities nationwide. Any entity, from large banks to a community development financial institution, from a venture capital group to a developer consortium, as well as regional economic development organizations and even individual tax payers can establish a fund as long as they follow the guidelines set out by the statute and Treasury (in the process of being finalized).

To become a qualified Opportunity Fund, an eligible taxpayer self-certifies by completing a form (Form 8996) and submitting the form with the taxpayer’s federal income tax return for the taxable year. The IRS has release a draft of the certification form as well as draft instructions.

Opportunity Funds must hold at least 90 percent of their assets in qualifying Opportunity Zone Property (defined below), and will be tested at the 6-month and year-end points to ensure compliance (final guidance on the initial timing of this test is forthcoming).

The policy enables funds to be responsive to the needs of different communities, allowing for investment in operating businesses, equipment, and real property. For example, funds can make equity investments in new or expanding businesses by purchasing original-issue stock of the company if substantially all of the company’s tangible property is and remains located in an Opportunity Zone. Funds can take original interests in partnerships that meet the same criteria. Funds can also invest directly in qualifying property, such as real estate or infrastructure, if the property is used in the active conduct of a business, and if either the original use of the property commences with the fund or the fund substantially improves the property by investing at least as much as the investor’s basis in refurbishments.

Yes. An Opportunity Fund must invest at least 90 percent of its assets in qualified Opportunity Zone property, whether in one zone or across multiple zones.

No. In order to qualify for the tax incentives, investors must invest through a qualified Opportunity Fund.

Treasury is given broad authority to promulgate rules and regulations to prevent abuse of the incentive, and the Department is currently in the process of writing those rules. The statute itself includes several provisions designed to mitigate the potential for abuse and market distortion. Investors cannot simply park their money in real estate, for instance, since investors in used property are required to substantially improve it in order to receive benefits from the incentive. Treasury will conduct twice-yearly tests to ensure funds maintain at least 90 percent of their assets in qualified property and levy penalties for violations. In addition, standard related party restrictions apply to all zone and fund transactions. Tangible property and active conduct tests will prevent zones from being used as patent boxes, and entities whose assets are primarily financial, such as banks, funds of funds, or holding companies, are not eligible for investment.

The U.S. Department of the Treasury released initial proposed guidance on October 19, 2018, which can be found here. A public hearing to discuss the proposed guidance and submitted comment letters is expected to be scheduled for early 2019, with subsequent rounds of regulations expected to released later in the year.

A summary of the proposed guidance can be found here.

EIG has also submitted two comment letters, the first in June 2018 requesting specific guidance prior to Treasury’s release of their initial rulemaking, and the second comment letter in December 2018 responding to the proposed regulations. These comment letters can be accessed here and here, respectively.

Stakeholders should expect several tranches of regulatory guidance taking different forms to be issued as the market matures.

EIG is a policy and advocacy focused organization, and as such, does not make or facilitate investments. EIG provides information about the Opportunity Zones incentive and how it works, as well as data about the designated zones. We are committed to working with all involved stakeholders–from investors to entrepreneurs, public sector leaders, philanthropies, and non-profits–to raise awareness and nurture this new ecosystem into existence.