The Tax Cuts and Jobs Act created quite a stir when it was first drafted and eventually passed, with all sides of the political spectrum arguing for and against the proposed changes. It is unfortunate, but commonplace now, that within Congress there are tremendous divides on just about every major issue. On taxes alone, the estate tax, pass-through business taxation, certain personal tax matters, acceptable deductions and the various waivers, each and collectively, are lauded or criticized. However, there was one policy within the Tax Cuts and Jobs Act that was attractive and beneficial to members of Congress on both sides of the aisle: Qualified Opportunity Zones.
Qualified Opportunity Zones was originally introduced in the Investing in Opportunity Act (IIOA) during the 114th Congress; it was reintroduced in 2017 in the 115th Congress by Sen. Tim Scott, R-S.C., and Sen. Cory Booker, D-N.J. and Representatives Pat Tiberi (R-Ohio) and Ron Kind (D-Wis.), where it received nearly 100 congressional cosponsors. The goal of these opportunity zones, or O-Zones according to the IRS, is to strengthen distressed neighborhoods across the United States through economic development and incentivize job creation in those communities.
Why do we need Opportunity Zones?
In the years since the housing recovery began, investment and development has been concentrated in “superstar” cities, including New York, Los Angeles, San Francisco, Miami and Phoenix. Meanwhile, more than 50 million Americans live in distressed neighborhoods that have yet to see much of any economic resurgence or development.
With so many people living in less-fortunate regions, governors in every state were tasked with identifying areas clearly demonstrating both the need and capacity to absorb new developments, where private capital could trigger significant economic change if properly invested. Hence, the Opportunity Zones were created.
Last month, the IRS released a set of regulations on Opportunity Zones, shedding light on the program, such as what qualifies as an opportunity fund, and other previously ambiguous requirements. With tax incentives offered within the Opportunity Zones program, we will start to see more willingness from the private sector to develop and bring much-needed infrastructure to underserved communities. That infrastructure will help bring new businesses and opportunities to those neighborhoods and will be a catalyst for growth, both in jobs and population.
Why invest in an Opportunity Zone?
According to the IRS, “Investors can defer tax on any prior gains until the earlier of the date on which an investment is sold or exchanged, or December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund.” Ultimately, the goal is to incentivize investors and developers to transform distressed neighborhoods into thriving economic hubs.
But Opportunity Zones can benefit another space as well: Environmental, Social, and Governance (ESG) investing. ESG investing is becoming more established among institutions and high-net-worth individuals looking for ways to diversify and enhance their portfolios in meaningful ways. Opportunity Zones can be viewed as an ESG investment with encouraging prospects, particularly for those entities investing in multifamily and workforce housing. As owners and operators in the workforce and multifamily housing space, we invest in ESG as part of our mission to provide a socially responsible investment that has a true social impact on the communities we serve.
According to the Joint Center for Housing Studies of Harvard University (JCHS), in 2015 there were more than 43 million rental households across the country — representing about 37% of households — a figure that has grown at a rate of nearly one million per year since 2010. The statistics show that many of these homes are located within current (and future) Opportunity Zones, presenting the volume conducive to improving workforce housing that will support job growth and provide safe environments that raise people’s standard of living.
Opportunity Zones offer a new, exciting and important investment vehicle within the United States. In addition to helping out communities that are struggling economically, the tax benefits are ideal. Investors can defer U.S. tax on certain gains and reduce the tax owed on such gains by up to 15%, and if they hold on to the QO Fund investment for at least 10 years, they are eligible for their QO Fund investment basis to equal its fair market value, which essentially means that any appreciation on the QO Fund investment is not subject to U.S. tax.
As this new tax break was just implemented, the ability to invest in Opportunity Zone is a powerful benefit that is expected to rapidly become popular among businesses and individuals. Currently, the zones include areas in 18 states (the complete list of Opportunity Zones can be found here), and more will be added over time, as these zones demonstrate the anticipated ability to revitalize neighborhoods and get even more people working.
Information is still lacking on Opportunity Zones, and therefore people are skeptical and unsure of how these O-Zones will impact our distressed communities. I believe, however, that if used correctly by developers and investors, they have the potential to strengthen economies and serve as a catalyst for growth in neighborhoods still recovering from the Great Recession. Opportunity Zone investments can attract new businesses, thereby potentially generating millions, if not billions, in economic development and create jobs in these communities.
Where jobs go, people follow. Austin, Texas, is an example of this trend, and if Austin’s growth and success is any indication of the possibilities for these Opportunity Zones, I think we will begin to see a turnaround in those neighborhoods.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.