All About Opportunity Zones

Many of the District of Columbia’s opportunity zones are located in the Anacostia neighborhood.
Image credit: Tim Evanson (flickr)

After years of confusion, the U.S. Department of Treasury and the IRS finalized rules and regulations regarding Opportunity Zones in December 2019. The new regulations help clear up uncertainties in the program, which was established because of the 2017 Tax Cuts and Jobs Act. The idea behind Opportunity Zones is to deploy capital to the more economically depressed areas of the U.S., thereby stimulating development activity and business growth. Those that participate in the program are incentivized by deferred taxes on previous capital gains and potentially zero federal taxes on future gains, which can be a big win for investors. Opportunity Zones are determined by the respective governor of each state; up to 25% of qualifying communities in a state can be designated as an Opportunity Zone.

Although the program has promise for success, there is still a massive ignorance in the investment community of how everything works – partially due to the previous lack of clarity on rules and regulations. Due to the uncertainty, some major players that are still experiencing big gains on Wall Street would rather not involve themselves in Opportunity Zones. Furthermore, the only way to completely avoid the taxable income of capital gains from the exchange or sale of a development or business in an Opportunity Fund is to hold the investment for at least 10 years. Those that are not comfortable with such a long-term hold period may not find the program so appealing. As a result, the program has experienced some struggles to attract investors.

On the other hand, those that have a solid understanding of Opportunity Zones and Opportunity Funds can prosper. In fact, Bisnow reported, “Novogradac found that the 500-plus Qualified Opportunity Zone funds it tracks raised more than $2B in equity in December alone, bringing total QOF investment to more than $6.7B since the passage of the Opportunity Zone program.” It is important to note the program allows 180 days to reinvest capital gains into an Opportunity Fund, which gives the ability to expand one’s portfolio. Moreover, the capital gains from an asset in an Opportunity Zone can be rolled over in a “Qualified Opportunity Fund.” The money can then be used to fund other developments or businesses in any of the 8,700 Opportunity Zones across the nation.