By: Matt Peurach
Have you heard of OZones? They have nothing to do with ozone gas in the atmosphere. It’s short for Opportunity Zones or – more formally – Qualified Opportunity Zones.
The zones are low-income communities that the U.S. Treasury designated as needing economic revitalization through new capital investment. The goal is to give low-income communities a boost by giving investors a tax break.
All 50 states, five territories, and the District of Columbia now have opportunity zones. Each zone is a census tract with a poverty rate of at least 20% and median family income up to 80% percent of the area median. (Limited exemptions are available for tracts contiguous to low-income areas.)
Many real estate investors are excited because investing in the zones – created through a bipartisan effort in the Tax Cut & Jobs Act of 2017 – can offer significant tax benefits. If a taxpayer sells property, stocks, or anything else that generates gains, they get a benefit if they reinvest those gains in what’s called a Qualified Opportunity Fund.
To be eligible, a taxpayer must reinvest the gain into a new opportunity fund within six months from the date of the earlier asset’s sale or exchange. They then use the capital in that new fund to acquire qualified assets in the low-income zones, with relatively little red tape involved.
The sooner they invest, the larger the tax benefits. There are three main tax benefits available to taxpayers investing in a qualified opportunity fund:
The taxpayer defers paying tax on the original gain until December 31, 2026.
The taxpayer receives basis increases on the fifth and seventh anniversaries of investing in the fund, eliminating 15% of the original gain from their gross income.
If the taxpayer holds the new investment 10 years, any gain attributable to the appreciation in the fund’s investments can be excluded from their gross income.
The tax attorneys here at Morris, Manning & Martin are already seeing a large pent-up demand as people await the last few details to come from the U.S. Treasury. That’s because the sooner investors act, the higher their tax savings.
This impacts smart growth in several ways. For example, these new opportunities could make large swaths of land more attractive targets for developments of all kinds – residential, office, retail mixed-use, etc. A map of the zones shows the while some are in rural areas, others are in Metro Atlanta and even intown. (Click here for the map and zoom into the state of Georgia.) This is true not just for Metro Atlanta but for areas nationwide. This could present a challenge in terms of developing land wisely instead of contributing to sprawl.
We hope that developers pursuing these opportunities will consider the Urban Land Institute’s principles of smart growth, such as building with community input and designing for walkability and transportation options, while preserving critical environmental areas and protecting water and air quality. This already works well in cities. These new opportunities give an opportunity to spread those ideas into the countryside as well.
This article originally appeared in the Saporta Report from the week of August 27, 2018.
Matt Peurach is a partner in the Tax Practice at law firm Morris, Manning & Martin, LLP. The firm is an annual sponsor of ULI Atlanta. For questions, Matt can be reached at 404-233-7000 or MPeurach@mmmlaw.com. This article is for informational purposes only and is not intended to be construed as legal advice.