Opportunity Zones - a 2023 Update

The Opportunity Zones Program, created by the Tax Cuts and Jobs Act of 2017, had a rough rollout in its first few years of existence. The need for increased regulatory clarity, fear of tax rate increases, and the economic disruption of the pandemic limited the program’s popularity and progress. 

But in the wake of newly proposed legislation, it seems that the Opportunity Zones Program may be here to stay for a while longer than previously expected. And there are potential considerable program benefits investors should keep in mind. 

Here’s what you need to know about opportunity zones for 2023: 

Q: What is an opportunity zone?

A: An opportunity zone is an economically-distressed area in which new investments may be eligible for special tax treatment. A high level of poverty, a low median family income, and a high unemployment rate characterize these regions.

Q: Where are the opportunity zones in the U.S.?

A: The first Opportunity Zones in 2017 spanned parts of 18 states; now, there are more than 8,700 opportunity zones in all fifty states, Washington, D.C., and five U.S. territories. For a list of opportunity zones or to see a map of the designated areas, visit Opportunity Now.

Q: What are the tax incentives for investing in an opportunity zone?

A: There are three key federal tax incentives for qualified investors. In short, the longer an investor holds onto a property, the higher the reward. Opportunity zone investors have the potential to receive:

• A temporary federal tax deferral exclusion for capital gains reinvested in an opportunity fund.

• A step-up in basis for capital gains reinvested in an opportunity fund.

  • The basis is increased by 10% of the deferred gain if the investment is held for at least five years. It increases by an additional 5% (to 15% total) if held for at least seven years.

• A permanent exclusion from federal taxable income of capital gains from investments held for at least 10 years.

Q: How do I invest in an opportunity zone?

A: To qualify for the tax incentives, you must invest through a Qualified Opportunity Fund, which is a privately managed investment vehicle with the specific purpose of investing in Qualified Opportunity Zone properties. The fund must hold at least 90% of its assets in opportunity zones and investors must be accredited, meaning they must meet a requirement of having a minimum net worth of $1mm, excluding their primary residence OR have annual incomes of $300,000 if married/$200,000 if single).

Conclusion

The bad news is that you cannot invest your capital gains directly in an opportunity zone business or property and still qualify for the incentives. The good news, however, is that bipartisan legislation has been introduced that would extend the Opportunity Zones program two more years through 2028 if enacted. These are just basic answers to common questions about the program, so tf you’d like to learn more or have specific questions about investing in an opportunity zone in our area, fill out the form below.