What are Opportunity Zones?

Opportunity Zones refer to low-income census tracts that are eligible to receive financial assistance under the Tax Cuts & Jobs Act. In order to be eligible, the tract must align with the stipulations outlined under the New Market Tax Credit. This means the tract includes both of the following:

• Poverty rate of 20%
• Non-metropolitan statistical area below 80% AMI

Additionally, the state’s governor nominated the census tract to receive the Opportunity Zone label. Governors were able to nominate up to 25% of their state’s eligible tracts to receive Opportunity Zone funds. The Opportunity Zones have been approved nationwide and it is unlikely any new opportunity zones will be nominated in the future.

What are Opportunity Zone Properties?

Under the Act, taxable investors are encouraged to reinvest their capital gains from asset sales into a Qualified Opportunity Zone Property (QOZP). As long as the transaction occurs within 180 days of the asset sale, the property will be eligible for several tax benefits. A Qualified Opportunity Zone Property is defined as:

• A property located in an Opportunity Zone
• A property used in a trade or business
• A property acquired for cash after December 31, 2017
• A property whose original use begins with the Opportunity Zone fund, or is significantly improved by the Opportunity Zone Fund

How do Opportunity Zones Work?

The Opportunity Zone Fund is a great way for real estate developers to finance projects in distressed areas, such as urban infills or historic renovations. Once capital gains are invested into a QOZP, the property is eligible for three significant benefits. Advantages of Opportunity Zones include:

• A temporary deferral on capital gains tax on the property until the date the investment is sold or December 31, 2026–whichever is earlier
• A 10% reduction of taxable gain invested in a QOZP if the investment is held for at least five years, with a 15% reduction if the investment is held for at least seven years
• An exclusion from capital gains tax realized on the sale of a QOZP after the 10-year anniversary

How to Invest in Opportunity Zones

Investing in an Opportunity Zone is as simple as investing in a QOZP. Real estate developers should use the CDFI Fund’s Opportunity Zones map and consider how they may use these new incentives to their advantage. Before investing in an Opportunity Zone, developers should also understand the long-term risks and benefits associated with distressed census tracts.