Opportunity Zones: A Review of Treasury Guidance.

Author:Thomas, Michael

Since October 2018, the U.S. Treasury Department has released two sets of guidelines clarifying how Opportunity Zones (OZ), an economic development policy signed into law through the Tax Cuts and Jobs Act of 2017, will work for investors, businesses, policy practitioners, and those who stand to benefit. Fashioned as a revitalization tool for economically distressed communities around the country, Opportunity Zones are designed as a throughway for previously unused capital. Although this new policy was met with excitement, it was marred by trepidation from those who had questions over the finer details of the initiative.

The goal of the governing policy is to inject untapped resources into areas that are in need of economic growth; this is to be achieved by attracting unrealized gains from the capital markets. The idea is to attract capital through tax incentives--a method the federal government has used before in attempting to funnel resources to regions that are in need of economic opportunity.

The federal government established Enterprise Zones in regions of the United States in the 1980s, followed by Empowerment Zones in the 1990s, and more recently, the Obama administration's Promise Zones. All of them were supposed to encourage economic activity in specific areas and can be considered "special economic zones." They all create incentives for investment by offering some kind of support from the federal government. Whether that support comes in the form of tax abatement, assistance with applying for federal grants, workforce training, or a combination of federally backed incentives, they all funnel new investment into certain geographic areas.


Like all broad stroke initiatives, OZs require a thorough look at the details to ensure an understanding of how those initiatives impact stakeholders at all levels, and if those impacts are in line with the initiative's legislative intent. OZs work by offering discounts on taxes owed when an investment sustains a capital gain. Unrealized gains are the difference in the cost-basis for an asset or investment and its current price after appreciation. Taxes are owed on the appreciation realized once the investment is sold for a profit, or a gain.

OZs allow investors to move unrealized gains into Qualified Opportunity Zone (QOZ) funds and receive a discount on those taxes owed based on how long the unrealized gains remain in the QOZ. There's an estimated $4 trillion in unrealized gains in the U.S. financial markets, so proponents of the policy contend that huge amounts of potential resources are available for new investments in OZs. Which areas qualify as OZs are based on a combination of Census data and selections made by the governors of the states the OZs are in. The U.S. Treasury has certified 8,700 opportunity zones in the United States and Puerto Rico.

If the unrealized gains invested are held in the QOZ for fewer than 5 years, the taxes owed on capital gains are deferred until the interest held in the QOZ funds are sold or exchanged. If the unrealized gains are held in the QOZ for 5 to 7 years, investors get a tax deferral and a reduction of 10 percent on the capital gain taxes they owed. If the unrealized gains are held for 7...

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