Opportunity zones were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017. The IRS identifies an opportunity zone as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and the Secretary of the U.S. Treasury has certified that nomination via his delegation of authority to the Internal Revenue Service.” Many of the communities identified as opportunity zones have lower incomes, higher poverty rates, and higher unemployment rates.
Tax Benefits of Investing in Opportunity Zones
The concept of opportunity zones is simple – they are intended to spur economic development and job creation in distressed communities. By bringing more capital to these communities, there is hope that the neighborhoods will develop and build economic strength.
Investors that participate in development in the identified zones will reap three primary tax benefits. Outlined below, the tax benefits identified are intended to fuel development in these otherwise unnoticed communities.
- Temporary deferral of taxes on previously earned capital gains. Investors can place existing assets with accumulated capital gains into Opportunity Funds.
- Basis step-up of previously earned capital gains invested. For capital gains placed in Opportunity Funds for at least five years, investor’s basis on the original investment increases by 10 percent. If invested for at least seven years, investors’ basis on the original investment increases by 15 percent.
- Permanent exclusion of taxable income on new gains. For investments held for at least ten years, investors pay no taxes on any capital gains produced through their investment in Opportunity Funds (the investment vehicle that invests in Opportunity Zones).
To invest in an opportunity zone, a Qualified Opportunity Fund must first be established. This fund is specifically set up as either a partnership or corporation for investing in eligible property that is located in an opportunity zone.
Opportunity Zones in Maryland
There are currently 149 designated opportunity zones in Maryland, including 145 low-income communities and four non-low-income contiguous tracts. The state is pushing to advance the development of opportunity zones, with thanks to Governor Larry Hogan. In January 2019, Governor Hogan announced that the “administration will introduce the More Opportunities for Maryland of 2019 to extend a 10-year credit for each new job created by a company that locates or expands in a Maryland Opportunity Zone. These companies will also be eligible for an additional $6 million in tax credits, have 100 percent of their state property taxes exempted, and have all business, recording, filing, or special fees waived.”
To find opportunity zones available in Maryland, the state has created a simple interactive map to assist developers in identifying opportunities. Participants, including investors, fund managers, property developers, new or expanding businesses, and local stakeholders can also utilize Maryland’s Information Exchange, which provides the latest opportunity zone news and activity.
Opportunity Zones in Delaware
There are currently 25 designated opportunity zones in Delaware, including 24 low-income communities and one non-low-income contiguous tract –100% of the state’s opportunity zones are located within urban areas. Many of the designated areas are also situated within Downtown Development Districts, which provide investors the chance for state investment rebates, local tax abatements, affordable bridge loans, and other state and local incentives – the two combined make it an ideal investment area for any developer.
Delaware additionally has created an easy to use interactive map that displays all opportunity zones within the state, and they have launched a business website that outlines all pertinent information necessary related to the options in Delaware.
A Final Word on Opportunity Zones
Opportunity zones are estimated to bring in $1.6 billion in revenue between 2018 and 2027, and the benefits of the program are anticipated to extend until 2047. There is a massive gap in the infrastructure of the United States, and the implementation of Opportunity Zone tax benefits is providing economic opportunities for both participating investors and the neighborhoods identified as Opportunity Zones.