Incentive In New Tax Law Could Be Development Opportunity

The Tax Cuts and Jobs Act included a new federal incentive — Opportunity Zones — to spur investment in poor and undercapitalized communities. These incentives could become the nation’s largest economic development “program,” but their potential for positive impact depends on decisions America’s governors make.

March 21 was the first deadline for governors (and the mayor of the District of Columbia) to select which among the roughly 56 percent of eligible census tracts should be classified as Opportunity Zones. Or, if they request an extension, governors can have 30 more days to decide.

Of the tracts designated eligible, governors get to designate 25 percent (or at least 25 tracts in states with fewer than 100 qualified tracts) as Opportunity Zones. The incentive provides three tax benefits for equity investing in Opportunity Zones. Investors could take advantage of one or more of the benefits.

• Permanent exclusion of taxable income on new gains. For investments held for at least 10 years, investors pay no taxes on capital gains produced through their investment in Opportunity Funds (the investment vehicles that make investments in Opportunity Zones).
• Basis step-up of capital gains invested. For capital gains placed in Opportunity Funds for at least five years, investors’ basis on the original investment is increased 10 percent. If invested for at least seven years, investors’ basis on the original investment is increased 15 percent.
• Temporary deferral of capital gains. Investors can place existing assets with accumulated capital gains into Opportunity Funds. Those capital gains are not taxed until the end of 2026 or when the asset is disposed of.

Read the full article about the new tax law incentive that could be a “development” opportunity by Brett Theodos at Urban Institute.