IRS Opportunity Zone Updates: Spring 2019
Since the Opportunity Zones program was announcing in 2017, the buzz around investing in Opportunity Zones has grown significantly. However, many of the rules of the program have not been particularly clear, leaving many investors confused. In an attempt to clarify things, the IRS released a new set of Opportunity Zone regulations on April 17, 2019, which, ideally, will increase investor confidence in the program, making it much easier for business owners, investors and Opportunity Fund managers to know what types of investments do and do not qualify.
Opportunity Zones in Ohio: What You Need to Know
Ohio, as the seventh largest state in the U.S., contains many extremely promising areas for Opportunity Zones investing, and, as there are a substantial 320 Opportunity Zones distributed througout the state, investors have quite a few areas to chose from. Today, Ohio is known for industries including fuel cell and solar energy development, medical research, aerospace and defense, rubber and industrial products, and tech research and development, which are all contributing to the state’s healthy rate of economic development.
What are the Capital Gains Tax Benefits of Opportunity Zones?
Investing in an Opportunity Zone can significantly reduce an investor’s capital gains tax liability, which is important if the investor owns one or more assets that they plan to sell in the near future. Capital gains tax is the tax charged on profits that are made when an investor sells an asset, such as a piece of real estate, stock in company, or an expensive collectable.
Opportunity Zones in Florida: What You Need to Know
In 2018, Governor Rick Scott announced the designation of 427 Qualified Opportunity Zones (QOZs) througout the state of Florida. These O-Zones are spread througout the state, however, they are concentrated in some of the state’s most populous areas; 68 Opportunity Zones are in the state’s most heavily populated county, Miami-Dade, while 34 Opportunity Zones are located in Duval County, home of Jacksonville, Florida’s most populous city. There are approximately 350,000 commercial properties located inside the state’s O-Zones, about 12% of all commercial properties in the state.
Opportunity Zones in Texas: What You Need to Know
Texas, the second largest state in the U.S., has 628 designated Opportunity Zones, making it one of the most promising areas for Opportunity Fund investing in the entire country. Texas has O-Zones located in or near all of its major urban areas, including Austin, Houston, Dallas, and San Antonio. The median household income of Texas’s Opportunity Zones is $36,268, compared to the median income of $57,547 for all census tracts in the state. In addition, 70.22% of Texas’s Opportunity Zones are located in a metro area, compared to 85.58% of all census tracts statewide.
Can the New Markets Tax Credit (NMTC) Program Be Used in Opportunity Zones?
The New Markets Tax Credit (NMTC) encourages investment and development in low income communities by offering tax credits to investors who make equity investments in specialized investment vehicles referred to as Community Development Entities (CDEs). Investors can claim a 39% credit (of equity invested) over a 7-year period. The NMTC program has helped create 178 million sq. ft. of commercial space and has financed more than 5,000 businesses. In comparison, the Opportunity Zones program allows investors to defer or reduce their capital gains taxes by investing in an Opportunity Fund, a specialized investment vehicle that has invested 90% of its assets into a Qualified Opportunity Zone (QOZ), one of 8,700 low-income census tracts througout the U.S.
Opportunity Zones in California: What You Need to Know
As the most populous state in the Union, California is ripe with Opportunity Zones— and opportunities to invest in them. While the largest Opportunity Zones in the state are located far inland, there are still Opportunity Zones in some of the state’s most densely populated areas, such as Los Angeles and San Diego Counties. For those who are unfamiliar, the Opportunity Zones Program is a federal tax incentive program created by the Tax Cuts and Jobs Act of 2017
Can the Historic Tax Credit (HTC) Program Be Used in Opportunity Zones?
The Historic Tax Credit (HTC) program is offers a federal tax credit to investors who rehabilitate and re-purpose historic buildings. To encourage investment, the program allows participants to take 20% of a project’s eligible rehab expenses as a credit against their federal income taxes. The program, which began in 1976, has been utilized for the rehabilitation of over 40,000 historic buildings. In contrast, the Opportunity Zones program offers investors a way to defer and/or reduce their capital gains tax liability by investing in properties and businesses located in Qualified Opportunity Zones (QOZs), economically disadvantaged areas certified by the U.S. Department of the Treasury.
What is an Opportunity Fund?
An Opportunity Fund is an investment vehicle specifically designed to facilitate into investment into designed low-income areas called Opportunity Zones. These funds allow investors to take advantage of a variety of tax incentives, including permitting them to defer their capital gains taxes until 2027. Opportunity Funds can be created by individual investors, who can place their own funds inside an Opportunity Fund, or by larger organizations, which can advertise these funds to private investors or to the general public.
Can The LIHTC Program Be Used in Opportunity Zones?
The Low Income Housing Tax Credit (LIHTC) program is the federal government’s primary incentive program to encourage investors and developers to create more affordable housing around the U.S. To do so, the program offers investors in affordable housing a dollar-for-dollar reduction on their federal income taxes. In contrast, Opportunity Zones program allows investors who put sell their investments and re-invest their money into qualified Opportunity Funds to defer their capital gains taxes until 2026, and, if they keep their money in the fund for at last 10 years, they pay no capital gains taxes on any new gains that their investment makes.
Opportunity Zones vs. 1031 Exchanges for Capital Gains Tax Deferral
Since Opportunity Zones offer an incredible opportunity for eligible investors to defer their capital gains until 2027, as well as to avoid any capital gains on any appreciation in their Opportunity Fund investment (given that it’s held at least 10 years), it’s often compared to another capital gains tax deferral mechanism, the 1031 exchange. While 1031 exchanges have many similarities to Opportunity Fund investments, they also have quite a few major differences.