Treasury Department Issues Guidelines on Opportunity Zone Program
The Treasury Department has issued its much-awaited guidelines for the new opportunity zone program which offers significant tax benefits to investors that make long-term investments in certain low-income communities that are designated as qualified opportunity zones.
The Treasury Department has issued its much-awaited guidelines for the new opportunity zone program which offers significant tax benefits to investors that make long-term investments in certain low-income communities that are designated as qualified opportunity zones. The program is designed to spur economic development and job creation in the nation’s more than 8,700 designated opportunity zones.
Based on a bipartisan bill sponsored by Sen. Tim Scott (R-SC), the program was established as part of the Tax Cuts and Jobs Act of 2017 and offers capital gains tax relief for new investments in certain economically distressed areas nationwide. A number of new OZ funds are expected now that investment sponsors have received guidance from Treasury.
The proposed regulations clarify what gains qualify for deferral, which taxpayers and investments are eligible, the parameters for opportunity funds, and other guidance. The Treasury Department plans on issuing additional guidance before the end of the year.
According to the proposal, investors can defer taxes until 2026 for capital gains from prior investments, if those gains are redeployed into opportunity zone funds. For opportunity zone investments held for five years, taxpayers can eliminate 10 percent of the deferred gain. For investments held for seven years or longer, 15 percent of the deferred gain can be eliminated.
Additionally, investors that hold their opportunity zone investments for at least 10 years are exempt from paying capital gains taxes on that investment.
“We anticipate that $100 billion in private capital will be dedicated towards creating jobs and economic development in opportunity zones,” said Treasury Secretary Steven Mnuchin. “This incentive will foster economic revitalization and promote sustainable economic growth, which was a major goal of the Tax Cuts and Jobs Act.”
Opportunity zones retain their designation for 10 years, but under the proposed regulations, investors can hold onto their investments in qualified opportunity funds through 2047 without losing tax benefits.
Working with state and local governments, the Treasury Department has certified 8,761 economically distressed communities in all 50 states, the District of Columbia, and five U.S. territories. Nearly 35 million Americans live in areas designated as opportunity zones.
Based on data from the 2011-2015 American Community Survey, the designated regions had an average poverty rate of more than 32 percent, compared with the 17 percent national average. Additionally, the median family income of the designated tracts were on average 37 percent below the area or state median, and had an unemployment rate of nearly 1.6 times higher than the national average.
The Treasury Department has submitted the proposed guidelines for publication on the federal register, and once published, the agency will open its 60-day public comment period.
