Part 1: What is an Opportunity Zone?
The 2017 Tax Cuts and Jobs Act established a section of the tax code that allows taxpayers to utilize a new investment vehicle called “Opportunity Funds”, in an effort to bring resources to low income communities known as Opportunity Zones.
What is an Opportunity Zone?
The Internal Revenue Service (“IRS”) describes Opportunity Zones as economically-distressed communities where new investments may be subject to preferential tax treatment, according to the criteria laid out in the Tax Cuts and Jobs Act. A low-income community must be designated as a qualified Opportunity Zone in order to benefit. Each state has a limited number of “population census tracts” (neighborhoods as determined by the Bureau of Census) that can be designated as qualified Opportunity Zones.
How are Opportunity Zones Created?
Opportunity Zones are created by a nomination and designation process. The Tax Cuts and Jobs Act laid out criteria for governors to designate potential Opportunity Funds for nomination. Up to 25% percent of low-income communities could be nominated. Low-income communities requirements are defined by the Internal Revenue Code Section 45D(e) as any neighborhood where:
- The poverty rate is at least 20 percent; or
a non-metropolitan area:
- the median family income does not exceed 80% of statewide median family income; or
a metropolitan area:
- the median family income does not exceed the 80% of statewide median family income and does not exceed the metropolitan area median family income.
In addition, 5% of each jurisdiction could qualify to be nominated if they met income and geographic criteria, including:
- that the neighborhood shares a border with a low-income community; and
- the median family income is no more than 125% of the median family income of the neighborhood it shares a border with.
Where are Opportunity Zones?
Opportunity Zones have been designated in every state and the U.S. territories. For an up-to-date detailed map published by the U.S. Department of the Treasury, click here.
What are the Benefits of Investing in Opportunity Zones?
- You can defer the capital gain tax
- Possible reduction of the amount of gain realized through a basis adjustment; and
- Possible permanent exclusion of gain on the appreciation for the interest in an Opportunity Fund
If you are interested in starting an Opportunity Zone Fund, reach out to Wilson Bradshaw & Cao, LLP and realize potential tax benefits.
Wilson Bradshaw & Cao, LLP is a boutique securities law firm in Irvine California and New York City. We help businesses solicit investors for both public and private companies in a compliant manner. We restrict our practice to securities law, focusing on private and public offerings and SEC enforcement work.