On April 9, 2018, the IRS announced its designation of Opportunity Zones in 15 states and 3 territories, which will remain in effect for 10 years. New investments of capital gain properly made in these Opportunity Zones will now qualify for preferential tax treatment.

Background         

The Tax Cuts and Jobs Act (TCJA) created Opportunity Zones to spur investment in distressed communities throughout the country by granting investors preferential tax treatment. Such investments must be made through Opportunity Funds, which are specially created investment vehicles that are required to have at least 90% of fund assets invested in Opportunity Zones.

The preferential tax treatment offered under the Opportunity Zone program is threefold: (1) Investors can defer tax on capital gains invested into Opportunity Zones until no later than December 31, 2026; (2) Investors that hold the Opportunity Fund investment for five or seven years can receive a 10% or 15% reduction on their deferred capital gains tax bill; and (3) Investors that hold the Opportunity Fund investment for at least 10 years can receive the added benefit of paying no tax on any realized appreciation in the Opportunity Fund investment.

Approved zones

States were required to submit their Opportunity Zone nominations by March 21st or request a 30-day extension. The Treasury approved all of the submissions made by March 21 and will make future designations for the states that requested extensions within 30 days from when the nominations are submitted.

Submissions were approved for: American Samoa; Arizona; California; Colorado; Georgia; Idaho; Kentucky; Michigan; Mississippi; Nebraska; New Jersey; Oklahoma; Puerto Rico; South Carolina; South Dakota; Vermont; Virgin Islands; and Wisconsin.

The CDFI Fund, which is supporting the IRS with the nomination and designation process, provides an interactive mapping tool that now includes a data layer for the newly designated Opportunity Zones. Users can perform searches by address or census tract to determine whether specific locations fall within Opportunity Zones. To use the mapping tool for this purpose, click here and select the "Opportunity Zone Tract Designated" data layer.

Forthcoming guidance

Additional guidance is expected on Opportunity Funds, particularly regarding certification.

Implications

The Opportunity Zone program has the potential to "unlock" capital gains and incentivize long-term investment in low-income communities throughout the country.

For taxpayers with unrealized capital gains, the kickoff of this program may be an opportunity to reevaluate the economics of holding versus recognizing the gain and reinvesting it in the tax-advantaged manner set forth by the program.

For those with assets or business operations currently located in or that can be prospectively located in Opportunity Zones, the program offers the opportunity to raise lower cost capital from outside investors or, if using internal funding, to recycle capital in a more tax-efficient manner.

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