If you’re intrigued by investing in the community and realizing a potential tax benefit, opportunity may be knocking in the form of opportunity zones.
The Tax Cuts and Jobs Act of 2017 created a new capital gains tax break incentive to invest in economically distressed areas. The longer the investor holds onto their investment in a qualified opportunity zone fund (up to 10 years), the greater the benefit.
These geographically demarcated opportunity zones are in more than 8,000 tracts, located in all 50 states, four territories and Washington, D.C. There are 176 such tracts in Tennessee, according to the Tennessee Secretary of State’s website. The tracts were, it says, “determined based on a strategic and data-driven review of county mayor feedback in addition to consideration of state priorities and initiatives including:
- Business development and brownfield redevelopment opportunities
- Retail, commercial and tourism development opportunities
- Community and rural development initiatives
- Low-income housing development opportunities
- Proximity to entrepreneur centers, technology transfer offices, and colleges and universities”
A January Knox News story described East Tennessee’s opportunity zone locations as "seven qualified zones in Knox County, four in Blount County, two in Anderson County, one in Union County, one in Roane County, two in Loudon County and two in Sevier County."
Local zones were identified as areas generally including “downtown Knoxville from the Convention Center northeast through Five Points Historic Neighborhood; Morning Side; Edgewood; Park City and the Zoo; Old Sevier; Vestal; Kingsley Station; Timberlake; Lakemoor Hills; Chandler; Mimosa Heights; Lakemont; Singleton; Mentor: Green Meadow; and South Hall, and Springbrook and Alcoa in Blount County.”
Here are the basics of how the zones work: If an individual realizes a capital gain on the sale of a building, property, stock or anything that generates a capital gain, they can invest that gain in a qualified opportunity zone fund.
Thus, an investor puts $10,000 into an opportunity zone fund, the money acquired from a sale resulting in a capital gain. The fund uses that and other money to buy a $50,000 building, subsequently making improvements to increase its value.
If the $10,000 opportunity zone investor holds the investment for five years, it results in a 10% discount on the capital gain assessed on the investment. Waiting seven years nets a 15% discount; however, those are small deferral returns, perhaps several hundred dollars in each case.
The payoff comes after an investor keeps the money invested in the fund for 10 years and the underlying property has, as is the hoped-for goal, increased in value. If the building sells for $100,000, the investor gets back the initial $10,000 and any gains obtained from the investment are tax-free. Not tax deferred, but tax-free.
A bit of a catch is that a capital gain must be invested in an opportunity fund within 180 days of the gain’s receipt. The opportunity fund doesn’t have to make the capital purchase within 180 days; rather, that’s the period by the end of which the investor’s money must be in the fund.
That’s a hard 180-day deadline. No extensions, no appeals. If the 180 days falls on Christmas, the investment must be made on day 179. Also, the day of the sale resulting in the capital gain is counted in the 180 days.
If there should be no gain, or the investment loses money, the investor can take a capital loss.
The IRS has a helpful question-and-answer website page on opportunity zones.
To see if an address is in an opportunity zone click here.
Assuming all works as hoped, an infusion of investment funds into economically distressed areas will bring development and jobs and eventually eliminate the need for an opportunity zone.
This article first appeared in KnoxNews.