Opportunity Zone Benefits and Incentives for Developers, Promoters and Potential Investors

January 8, 2019

Pullman & Comley

The “Opportunity Zone” community development program was established by Congress in the 2017 Tax Cuts and Jobs Act to encourage long-term investments in low-income urban and rural communities nationwide. To achieve this, Congress provided significant tax incentives to investors, with the intent that developers in these urban and rural communities may be able to proceed with projects that otherwise may have been difficult to fund.

For an investment to qualify for the tax incentives offered in this program, the invested funds must be from capital gain realized in a transaction with a non-related person within the 180-day period prior to the investment. The capital gain tax due from that transaction may be deferred until the earlier of 1) when the opportunity zone investment is disposed of; or 2) December 31, 2026. Also, the deferred gain may be reduced by 15%, so long as the opportunity zone investment is held for at least seven years.           

More importantly, if the opportunity zone investment is held for at least 10 years, when that investment is sold, all gain which would normally be recognized upon the sale of the investment is eliminated. Stated differently, there will be no taxable gain whatsoever on the sale of an opportunity zone investment meeting the 10-year holding period requirement.

In order to qualify for these benefits, the investment must have been made after December 31, 2017, and it must be an equity interest in a “Qualified Opportunity Fund” (a “QOF”). A QOF is a corporation, a limited liability company or a partnership that invests 90% or more of its assets in qualified opportunity zone businesses, either directly or through one or more entities. A business generally may qualify by purchasing tangible personal property or real property and using substantially all of that property in a qualified opportunity zone, or by acquiring tangible or real property and substantially improving that property over a 30-month period. The IRS has issued proposed regulations more precisely defining these terms and explaining necessary elections that each investor and the QOF must make in order to obtain the tax benefits described in the preceding paragraphs.

Thus, Congress has provided an incentive to investors so that funds flow to areas in need of economic growth, with the benefit to the investor that there will be no tax whatsoever to the investor if the investment is held for at least 10 years. It should be noted that the investment need not be sold after ten years. No matter how long it is held past 10 years, the entire gain will be tax-free.

Congress has also provided an incentive to entrepreneurs and real estate developers to offer business opportunities to investors. There will presumably be better access to capital to fund new businesses or real estate developments.