Putting Opportunity Zone Investment Dollars to Work

  • The Tax Cuts and Jobs Act of 2017 provided for the creation of Opportunity Zones which are census tracts throughout the US that meet OZ designated criteria for economic development.

    • ​Goal to inject capital into low-income communities and promote long term economic growth

    • Specific census tracts nominated by governors of all 50 states for designation as Opportunity Zones

    • Federal certification of Opportunity Zones finalized on May 18, 2018

    • Investors must invest through newly created "Opportunity Funds" 

    • Opportunity Funds may purchase and improve real estate​

    • Opportunity Funds may also purchase or invest in existing businesses that qualify as Opportunity Zone Businesses​

  • Investors must invest capital gains from any existing investments into an Opportunity Fund ​

    • Investment recognizes a reduction and deferment of capital gains taxes

    • If held for 5 years, tax basis of original investment increased by 10%​

    • If held for 7 years, tax basis of original investment increased by 15%

    • After 10 years, post acquisition gains are permanently exempt from capital gains taxes​

  • Investors must invest through Qualified Opportunity Funds "QOFs" that must only invest in projects that satisfy the "Original Use Test" or the "Substantial Improvement Test".

    • To satisfy the Original Use Test, the original use of the property within the Opportunity Zone begins with the investment in the Qualified Opportunity Fund. A good example of Original Use is development of raw land. The QOF purchases land and builds an apartment building. Before the apartment building, the land had no economic use so the apartment building satisfies the Original Use Test.

    • To satisfy the Substantial Improvement Test is a bit more complicated and primarily applies to existing buildings. The QOF must invest in improvements that equal or exceed the fund's basis in the building, not the land, at the time of acquisition. For example, if the fund purchases an existing building within an Opportunity Zone for $500,000 and the building is assessed at $300,000 and the land is assessed at $200,000, the Substantial Improvement Test is met if the fund invests $300,000 to improve the building. Moreover, given that real estate improvements take time, the fund has 30 months to make a substantial improvements. 

  • Investors may also invest in Qualified Opportunity Zone Businesses which may be preexisting entities. An example of this might be an apartment complex that has suffered years of deferred maintenance. The rules above apply as do the following:

    • To qualify as an OZ Business, 70% of all tangible property owned or leased by the business must be qualified Opportunity Zone Business property.

    • Working capital intended to acquire, construct, or rehabilitate tangible business property used by a business operating within an OZ can be held for 31 month providing that the QOZ Business documents the intended use with a written schedule and can prove that the capital was put to the intended use.

    • At least 50 % of the gross income of a QOZ Business must be derived from the active conduct of a trade or business located within an OZ.

    • A substantial portion of the intangible property of an QOZ Business must be used in the active conduct of a trade or business located within an OZ.

For more information on the latest guidance and recommendations from the Opportunity Zone Working Group

 click here