Opportunity Zones

The Opportunity Zones program, established via the Tax Cuts and Jobs Act, aims to spur long-term private sector investments in low-income communities nationwide. Investors in Qualified Opportunity Funds participating within designated Qualified Opportunity Zones can take advantage of federal tax benefits in exchange for their contributions to economic growth and investment in distressed communities. Project sponsors can also benefit from lower-cost capital generated by the program. 
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How it works:
The Opportunity Zones program offers federal tax incentives for investing unrecognized capital gains in Qualified Opportunity Funds, which are investment vehicles created specifically for these purposes. The amount of benefit ultimately recognized depends on the holding period of the investment.

1. Deferral: Investors receive a temporary deferral of tax on capital gains reinvested into Qualified Opportunity Funds. The reinvestment must be made within 180 days of the sale creating the gain. The period of deferral ends upon the earlier date of the sale of the reinvestment in the Qualified Opportunity Fund or Dec. 31, 2026.
2. Reduction: The reduction benefit provides investors a step-up in basis, the amount of which is contingent on the length of time they maintain the investment in the qualifying fund. If the investment is held for five years, 10 percent of the original gain is eliminated. If it is held for seven years, an additional 5 percent is eliminated. In total, the reduction benefit allows investors to potentially exclude up to 15 percent of the original gain from taxation.
3. Exclusion: If the investment is held for at least 10 years, the appreciation on the investment is permanently excluded from taxation. Based on a plain reading of the new law, it appears this only applies to additional appreciation after the investment in the Opportunity Fund is made.  As additionally noted below, further guidance is needed from the IRS or Treasury Department to clarify uncertainties within the provisions.

How to establish a certified Qualified Opportunity FundEligible taxpayers may self-certify to become a Qualified Opportunity Fund by attaching to its tax return Form 8996. No approval or action by the IRS is required.
Where are the Opportunity Zones?Use the interactive map provided by Baker Tilly to search the complete list of Opportunity Zones that have been nominated, certified and designated.

What’s next?
There are a number of open issues surrounding the Opportunity Zones that require guidance from the U.S. Treasury Department or Internal Revenue Service. The first round of guidance arrived in late October and more is anticipated by year-end. We expect the additional guidance to focus on open questions related to operational issues, such as the availability of the 31-month runway for the deployment of funds in a direct investment model and the ability for residential rental property with a triple net lease to qualify as an active trade or business for the purpose of qualification as qualified Opportunity Zone business property. We will provide regular updates as the program continues to take shape and investment criteria and timing is outlined.

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