What is an Opportunity Zone
Opportunity zones were created in the 2017 Tax Cuts and Jobs Act to help economically distressed communities benefit from a capital gains tax incentive. The Governor from each state nominated economically distressed areas (census tracts) based on the following low-income requirements as defined by U.S. Internal Revenue Code Section 45D(e)
- Poverty Rate < 20%; or
- Median family income of:
- No more than 80% of statewide median family income for census tracts within non-metropolitan areas.
- No more than 80% of the greater statewide median family income of the overall metropolitan median family income for census tracts within metropolitan areas.
Up to 25% of census tracts of each jurisdiction that met this criteria could be nominated. An additional 5% of each jurisdiction could quality if the met additional income and geographic requirements:
- Census tract contiguous with low-income Opportunity Zone and
- Median family income of no more 135% median family income adjacent Qualified Opportunity Zone
How do They Work
You sell a building for $2 million with $1 million capital gain. $150K capital gains tax are due (15% tax rate).
You deposit $1 million capital gain into Qualified Opportunity Zone fund which is used to purchase real estate, partnership interest, or equity in an existing business inside Opportunity Zone Census Track. $150K capital gains tax is deferred.
Hold the asset inside the Qualified Opportunity Fund for 5 years cost basis is reduced by 10% capital gain tax is reduced by 15K; Hold for 7 years cost basis is reduced by 15% capital gain tax reduced by 22.5K
10 Year Sell
After 10 years asset is now sold for $2 million ($1 million capital gain); pay no capital gains tax on $1 million.
Total Tax Savings at 10 years $172.5k: $22.5k (savings from original $1 million capital gain) plus $150K (savings from $1 million capital gain of Qualified Opportunity Fund)