Frequently Asked Questions
(Last updated January 2019)
A new national community investment program that connects private capital with low-income communities across AmericaEIG Launches Interactive Map Highlighting Innovative Opportunity Zone Activity
(Last updated January 2019)
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.
Creating a stronger, fairer New Jersey begins with expanding opportunity equally across all communities; the Opportunity Zone Program will be a vital resource in stimulating long-term economic growth and investment in cities and towns that need it most, and more importantly, in generating economic opportunities for our residents.
Governor of New Jersey
We focused on local, regional, and state priorities, as well as Virginia’s diverse geography and economic opportunities, to strategically select a balance of zones that align with other state and local economic development and revitalization efforts. My administration is committed to maximizing this important federal tool to strengthen our local and state economic development efforts and ensure Virginia is at the forefront of attracting new Opportunity fund investments.
Governor of Virginia
Opportunity Zones are an exciting new tool for building economic development in underserved communities. These grants will help guide us as we implement the program to maximize the benefits of job creation and neighborhood improvement in the most vulnerable areas of our city.
Mayor of Atlanta, Georgia
My administration believes that Opportunity Zones can only work to revitalize our neighborhoods when local knowledge, creativity and ingenuity are harnessed to invest in the quality of life of our residents. That is why we are setting a goal to train 500 Birmingham residents on Opportunity Zones by summer 2020 so that residents can identify and shape projects throughout our city.
Mayor of Birmingham, Alabama
We are honored to be recognized as a national leader in Opportunity Zones. With 126 designated zones that span the state, Colorado’s Opportunity Zones are attracting capital to our state, helping to grow our economy and supporting our rural communities. I’m proud of all the hard work so many have done to ensure Colorado leads the way in deploying this compelling federal tax incentive.
Governor of Colorado
These Opportunity Zone designations will help build on our ongoing community development efforts and encourage additional private investment where it can have the most impact – in economically-distressed communities.
By investing $12 million in Rebuild Illinois funds in Opportunity Zone projects, we can take advantage of this federal tax incentive to stretch our capital dollars further while creating jobs and opportunities in communities that have suffered from a lack of investment for decades.
Governor of Illinois
Opportunity Zones have the potential to generate the kind of economic activity that can transform lower-income areas across our state. Our economic developers, local governments and investment professionals are well-positioned to put this program to work for Louisiana.
Governor of Louisiana
We plan to do everything in our power to utilize new and existing state and federal programs, grants and funding sources, and to have all of our state agencies work collaboratively with our county and municipal governments and the private sector to supercharge our opportunity zone revitalization. Our plan is to make Maryland’s 149 opportunity zones the most competitive ones in America.
Governor of Maryland
The opportunity zone program helps leverage private investment in Massachusetts cities and towns and can be a catalyst for job creation and economic activity.
Governor of Massachusetts
If we want to call Michigan a successful state, we’ve got to expand opportunities for business owners in our opportunity zones. I’m confident that the cabinet I put together will partner with Michigan business owners and ensure they have the resources they need to create more good-paying jobs. This executive directive will take a much-needed step toward building vibrant communities here in Michigan.
Governor of Michigan
The Opportunity Zones program provides Minnesota a great opportunity to work with local community leaders and our federal partners to build upon that important work and improve people’s lives.
Former Governor of Minnesota
One of the goals of my administration is to spread investment to all corners of New Mexico and we want to use every tool we can to accomplish that. That’s why we are going ‘all in’ for Opportunity Zones and giving an extra boost to help these communities.
Governor of New Mexico
These Opportunity Zones and the funds that support them will provide access to capital in low-income communities that otherwise may not attract it. It’s another tool to help cities reach their full potential and create healthy, vibrant communities that can attract and retain a 21st-century workforce.
Governor of North Dakota
Communities nationwide are competing for private investment in their Opportunity Zones, and we want to give Ohio communities the edge. This will make it more attractive for investors to direct their investments here.
Governor of Ohio
Our goal is economic prosperity for all Utahns. Opportunity Zones will go a long way in helping to support growth in economically-distressed areas throughout the state.
Governor of Utah
We are focused on leveraging the Opportunity Zones incentive to create new jobs, amenities, and economic opportunities for DC neighborhoods that need them most. With the OZ Marketplace and Community Corps, we are providing existing residents and small businesses owners with the expertise and platforms they need to navigate potential Opportunity Zone transactions.
Mayor of Washington, D.C.
From the City of Pawtucket’s perspective, without those types of opportunity zones and the [tax-increment financing] district legislation, we would be sitting here as we have for the last twenty something years in Pawtucket without these types of developments.
Mayor of Pawtucket, Rhode Island