Opportunity Zones

Few issues have captured the attention of city leaders like “opportunity zones.” But for many cities, towns and villages, there is more confusion than clarity. NLC is pursuing a new line of work to help cities understand and maximize the local impact of opportunity zones for all residents.

The opportunity zone program was created under the 2017 Tax Cuts and Jobs Act to provide local and national investors with a tax incentive for investments in economically distressed areas of the country. More than 8,700 opportunity zones have been designated across all 50 states for the next 10 years. 

See below for our frequently asked questions and resource guide to learn more, and type your city into the below map to find out if your city or town has an opportunity zone.

Opportunity Zone Across America

 

What are opportunity zones?

Opportunity zones are intended to be a “place-based” strategy to drive investment into economically distressed neighborhoods through a new federal tax incentive.

Zones are designated census tracts that are deemed “low income communities.” Each tract has a poverty rate of 20 percent and/or an average family income that falls below 80 percent of the area’s median income. A small number — less than five percent — of opportunity zones are tracts that are contiguous, or adjacent, to one or more low income communities. The income of the contiguous tract must be less than 125 percent of any neighboring low-income tract.

State governors nominated up to 25 percent of their states' low-income census tracts in their state to be designated as opportunity zones. These designations have been approved by the U.S. Treasury and now make up the current opportunity zones map. Currently, there are more than 8,700 opportunity zones across the country.

What are “opportunity funds,” and who can invest in them?

An opportunity fund is a vehicle for investing in opportunity zones. Any taxpayer with capital gains will be able to create an opportunity fund to invest in opportunity zones. While rules are still being laid out by the Internal Revenue Service (IRS) as to how these funds will be certified, we know that least 90 percent of fund assets must be put into zone property stocks, partnership interest or business property. A fund can be of any size, and can apply to a single project or multiple across an area (city/region), single state or multiple states.

Anyone with unrealized capital gains can invest or create a fund.

What is the incentive?

From the Michigan State Housing Development Authority:

  1. Temporary Deferral: A temporary deferral of inclusion in taxable income for capital gains reinvested into an opportunity fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of or December 31, 2026.
  2. Step-Up in Basis: For capital gains reinvested in an opportunity fund, the basis is increased by 10 percent if the investment in the opportunity fund is held by the taxpayer for at least five years and by an additional five percent if held for at least seven years, thereby excluding up to 15 percent of the original gain from taxation.
  3. Permanent Exclusion: A permanent exclusion from taxable income of capital gains from sale or exchange of an investment in an opportunity fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an opportunity fund.
Where will the money invested in opportunity funds go?

The money invested into opportunity funds can be used in a variety of ways. Unlike with past programs, there are few rules as to where the money can go. However, qualified funds must be investment vehicles that are organized as corporations or partnerships that invest at least 90 percent of its assets in an opportunity zones. These assets can include stock ownership in a business that conducts more of its operations in an opportunity zone, and property such as real estate. Projects that could be funded include affordable housing, infrastructure, commercial development and business start-up or growth.

How can local leaders prepare for this program?

As we learn more about the U.S. Treasury’s regulation of opportunity zones and the private sector begins to respond, NLC will provide specific recommendations and best practices for cities. Local leaders should learn if their city has opportunity zones within its jurisdiction. But even cities without opportunity zones should identify zones in nearby cities as investment can affect adjacent areas. Should a city have a designated zone, local leaders should begin to think through how potential investments can meet municipal priorities. NLC encourages city leaders to consider how to deploy existing resources to support investment in zones before creating completely new economic development infrastructure.

Resource Guide

NLC Resources:

For more information on opportunity zones check out these resources: