An Overview of the Opportunity Zones Program by Raj Bandla, Locke Lord LLP


When the Tax Cuts and Jobs Act was signed into law at the end of 2017, most Americans were focused on understanding the law’s impact on individual and corporate tax rates, mortgage interest deductions and the alternative minimum tax. But in the weeks that


followed, members of the affordable housing community began paying more attention to a less-covered piece of the legislation: the section establishing the Opportunity Zones program.


The program was envisioned as a two-step effort to attract private investment into economically distressed areas. The first step, which is now complete, involved identifying the areas in greatest need of private investment. The second step, now underway, is rewarding long-term investment in the areas identified as greatest in need.


Step 1: Identifying the Qualified Opportunity Zones The Tax Cuts and Jobs Act tasked each U.S. state and territory with nominating low-income census tracts for designation by the Department of the Treasury as “qualified opportunity zones”. In Texas, 628 census tracts were nominated by Governor Greg Abbott, all of which were eventually designated as qualified opportunity zones. Qualified opportunity zone designations are not subject to change, meaning any census tract already designated as a qualified opportunity zone will retain that designation indefinitely. A nationwide map of designated qualified opportunity zones is available at: Map of Qualified Opportunity Zones.


Step 2: Incentivizing Opportunity Zone Investment Those familiar with a 1031 “like-kind” exchange will recognize the Opportunity Zone program’s primary incentive of offering a deferral of capital gains tax as a reward for a long-term investment. Under the Opportunity Zone program, when a taxpayer makes a sale resulting in a capital gain, the taxpayer can defer being taxed on the capital gain by reinvesting it in a “qualified opportunity fund” within 180 days. A qualified opportunity fund is defined under current legislation as any investment vehicle with at least 90% of its assets invested in a trade or business located in a qualified opportunity zone.


Three primary incentives are offered for qualified opportunity fund investors: • Deferral of Capital Gains Tax. A taxpayer that reinvests its capital gain in a qualified opportunity fund can defer recognizing the capital gain on a tax return until the earlier of (i) December 31, 2026 and (ii) the date on which the qualified opportunity fund investment is sold.


• Reduction in Capital Gains Tax. In addition to benefitting from a deferral of capital gains tax, any taxpayer that holds its quali- fied opportunity fund investment for at least five years will see its capital gains tax reduced by 10%. An investor that holds its qualified opportunity fund investment for at least seven years will see an additional reduction in capital gains tax 5%, for a total possible reduction of 15%. As an example, if on August 1, 2018 a taxpayer reinvests a $1,000 capital gain in a qualified opportunity fund and holds the investment until August 1, 2023, only $900 of the original capital gain will be taxable when the investment is sold. If the taxpayer holds the investment until August 1, 2025, only $850 of the original capital gain will be taxable.


• No Tax on Appreciation of Qualified Opportunity Fund Investments. Once a qualified opportunity fund investment has been held for ten years, a taxpayer will see the tax basis of the investment made equal to its fair market value. As a result, if a quali- fied opportunity fund investment is held for ten years or longer, any appreciation in value of the investment will not be taxed when the investment is sold.


As you may have noticed, the benefits of a qualified opportunity fund investment accumulate over time and reward long-term investors. As a result, equity investors in affordable housing projects, many of which already invest on 10-15 year timelines, may be some of the best positioned to take advantage of this program.


Unanswered Questions It is worth noting that while current legislation provides a general framework for the Opportunity Zones program, many unanswered technical and practical questions remain. The Internal Revenue Service is expected to issue guidance addressing many of these questions later this year. Despite the unanswered questions, the affordable housing community is excited about the potential of this new program.


Page 18 TALHFA Summer 2018


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