In December 2017, when the Trump administration signed The Tax Cuts and Jobs Act of 2017 (TCJA), the Opportunity Zone program was designed and has been attracting real-estate developers and investors holding capitals waiting for the new investment since its launch.
The Opportunity Zone program provides tax breaks to firms and individuals who invest in the opportunity zone, which is urban and rural areas with a certain income or poverty thresholds. In May, the Department of Treasury designated almost 9,000 census tracts as opportunity zones all across the country, including Puerto Rico. According to the Treasury, nearly 35 million Americans currently reside in the so-called opportunity zones, where there are higher poverty levels and unemployment rates than in the rest of the country. Champaign, a city that encompasses a large University of Illinois, is also announced as the designated opportunity zone in the 13th Congressional District.
There are two large benefits that investors could gain from investing in the zones. First, investors can transfer capital gains from other unrelated investments into the zones and defer those taxes of capital gains until the end of 2026. The tax could be reduced by up to 15% depends on how long those investors hold on to their investments. Second, if the investors hold on to their investments for at least 10 years, taxes that occurred from capital gains of zone investments could be avoided. With these tax benefits, the program is predicted to attract nearly $100 billion in investment but to reduce federal tax revenue by $9.4 billion between 2018 and 2022.
In the opportunity zone program regulations released in October, a “70-30 rule” is also included. This rule measures if the business has 70% of its tangible property invested in a zone. If the business fails to meet the 70% requirement, it will lose its qualification for the tax break. Also, the regulation provides businesses a grace period of up to 36 months to reinvest their working capital from selling the prior investment. This new rule relieved common issues faced by the real-estate developers who were concerned about the short six months reinvesting period that was required by the law before. However, the regulation does not only include reliefs. The Treasury also formed a rule that requires a certain amount of improvement to be made on the building before the property could be qualified as a new investment for the program.
The Opportunity zone program already has attracted wealthy investors, including Under Armour Inc., Goldman Sachs Group Inc., Bank of America Corp., and Wells Fargo. The program was initially intended to improve the situation of struggling areas with high poverty level. A constant watch on those companies would be crucial in preventing them from exploiting the tax-break.
Haein Shin, Tax Advisors for Champaign Society