On April 18, 2018, the IRS announced the additional designation of Opportunity Zones in five states and one territory, 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 must 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

Submissions were approved for: Alabama; Delaware; Missouri; Ohio; Texas; and the Northern Marianas Islands.

Submissions were previously 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 (see Tax Alert 2018-0806).

The CDFI Fund, which is supporting the IRS with the nomination and designation process, provides an interactive mapping tool that 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.

Implications

Opportunity Zones in the remaining states and territories should be identified by the end of May, marking a major milestone in this new program. We are still awaiting clarifying regulations from the IRS, which are expected to provide necessary information about the program. This guidance should be released in the coming weeks. Until that time, we encourage taxpayers that think they may be able to benefit from the Opportunity Zones program to educate themselves so they are prepared to move quickly.

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