Opportunity Zones: A Positive Impact for Communities and Investors

Minimize existing capital gains taxes and generate tax-free capital gains

The Opportunity Zone (“OZ”) is suitable for investors who are looking to minimize existing capital gains taxes and generate tax-free capital gains over a ten-year time period. As part of The Tax Cuts and Jobs Act of 2017, a new tax benefit was created allowing the deferral of capital gains that are invested in Qualified Opportunity Zones (“QOZ”) to spur investment and economic growth in distressed communities.

What Is an Opportunity Zone?

OZ’s are special geographic districts designated by each state. Under the new legislation, taxpayers can defer tax on capital gains invested into Qualified Opportunity Fund (“QOF”) that purchase and improve real estate or businesses located in OZ’s.

As of June 14, 2018, the U.S. Department of Treasury and Internal Revenue Service announced the final round of OZ designations. There are more than 8,700 designated OZ across all 50 states and five U.S. possessions. Approximately 35 million Americans live in the communities designated as OZ.

• OZ’s are intended to be advantageous for both distressed communities needing investment dollars and investors looking to minimize capital gain taxes;
• Average poverty rate in OZ areas is 32% whereas the average U.S. census tract is 17%;
• Median family income is less than 80% of the surrounding areas;
• OZ’s that have already been approved can be seen on a map available at: http://eig.org/opportunityzones.

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How It Works

• A QOF must be organized as a U.S. corporation or partnership that holds at least 90% of its assets in one or more qualified Opportunity Zones.
• Investments must be made in a QOF and be located in OZ’s to receive benefits.
• Certified by the U.S. Treasury Department with an OZ designation

QOF investments are limited to equity investments in:

• Businesses
• Real estate - Subject to a substantial rehabilitation requirement
• Business assets

QOZ property includes:

Newly issued stock

• Capital or profits interest in a domestic partnership acquired/created after Dec. 31, 2017
• Formed for the purpose of being a “QOZ business”

Partnership interests

• Capital or profits interest in a domestic partnership acquired/created after Dec. 31, 2017
• Formed for the purpose of being a “QOZ business”

Business property

• Tangible property used in a trade or business of the QOF

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QOZ business is defined as a trade or business in which:

• Substantially all of the tangible property owned or leased is QOZ business property;
• At least 50% of the gross income is derived from the trade or business; and
• A substantial portion of any tangible property is used in the trade or business.
• Note: Loans are not eligible for the tax incentives.

Why Should an Investor Allocate to a QOF?

The OZ program provides incentives to focus on community revitalization over the long-term while providing downside protection and low correlation to cycles. In addition to tax incentives, there are several reasons to include real estate in a multi-asset portfolio, including potential return enhancement, risk diversification, inflation hedge/protection, and low volatility.

• Opportunity to rebalance portfolio and minimize tax liabilities;
• Deferment of unrealized capital gains, up to 15% in step-up basis;
• Exclusion of new capital gains tax on investment;
• Tax benefits include increased expensing and depreciation; and
• A genuine sustainable impact.

Reinvested Capital Gain Benefit?

U.S. investors currently hold $2.3 trillion in unrealized capital gains, representing a significant untapped resource for economic development.

How does a capital gain of $100 reinvested in 2018 perform over time?

An investor will have greater upside if the QOF holds the investments for at least 10 years. Over a 10-year investment period, an investor will have an increase value of 44% for every $100 of capital gains placed in to QOF than if they had chosen a traditional stock portfolio.(1)