Opportunity Zones

Opportunity Zones are a new community development program created by the Tax Cuts and Jobs Act of 2017 to encourage investment in economically distressed communities. The program provides investors with deferral or elimination of capital gains on new investments if those investments are made in low-income census tracts designated as Opportunity Zones by the State. Investors in Opportunity Zones can earn significant benefits by investing in real estate and operating businesses in Opportunity Zone areas. They can also make long-term investments in Opportunity Funds, which are vehicles structured as partnerships or corporations for investing in qualified Opportunity Zone property.

Although Opportunity Zone investments have received a great deal of attention, it’s unclear whether they’re having any impact on the disinvested communities that need them most. Research on Opportunity Zones is limited, because investment data are collected through tax forms and subject to legal constraints. But early analysis suggests that most of the capital invested in Opportunity Zones went to real estate, and only a small amount to operating businesses. The majority of investments were in market-rate rental housing and commercial and industrial properties, which tend to have higher returns than operating business assets.

Opportunity Zones Tax Benefits

The Opportunity Zone program offers investors a potentially significant tax incentive in economically distressed communities nationwide. It was enacted in the 2017 Tax Cuts and Jobs Act as an incentive for long-term private capital investments in low-income urban, suburban, and rural census tracts that have historically been underinvested and cut off from outside investment.

Investors can defer their capital gains taxes if they invest in qualified opportunity funds, which must invest at least 90% of their assets in qualifying opportunity zone property. Then, if they hold those investments for at least 10 years, investors can step up their original investment in the fund to fair market value – eliminating the tax on the initial gain.

Despite the incentive’s intentions, it could benefit affluent investors instead of local residents. The law includes no requirements to ensure that investments made in opportunity zones actually create jobs or spur other economic improvements that benefit local residents, and Treasury’s first proposed regulations encourage abuses that might undermine the intent of the program. Moreover, the real estate focus of most opportunity zone investing is a red flag.

Opportunity Zones Map

Opportunity Zones Map

In one of the most daring experiments in federalism, Congress gave governors the chance to identify low-income communities with clear needs and the potential to attract private investment. In turn, the Treasury Department would provide tax incentives to encourage that investment. Governors took up the challenge, adapting their selection processes to the unique circumstances of each state and territory. Many leaned on public and local government engagement, rigorous analytics, and peer-learning to strike a balance between needs and capacity.

For example, New York is taking advantage of this new tool, attracting investment with 514 designated Opportunity Zones. The New York City real estate market is particularly attractive, with 94,000 of the city’s 750,000 commercial properties located within Qualified Opportunity Zones.