How were opportunity zones created? i
Opportunity zones were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017.
Have opportunity zones been around a long time? i
No, they are new. The first set of opportunity zones, covering parts of 18 states, were designated on April 9, 2018. opportunity zones have now been designated covering parts of all 50 states, the District of Columbia and five U.S. territories.
What is the purpose of opportunity zones? i
Opportunity zones are an economic development tool—that is, they are designed to spur economic development and job creation in distressed communities.
How were Opportunity Zones designated? ii
Low-income community census tracts, defined in Section 45D of the Internal Revenue Code, are the building blocks of Opportunity Zones. Eligible low-income census tracts had either poverty rates of at least 20 percent or median family incomes no greater than 80 percent of their surrounding area’s, according to the U.S. Census Bureau’s 2011-2015 American Community Survey.
The governor or chief executive of every U.S. state and territory nominated up to 25 percent of their low-income census tracts to be certified by the Secretary of the Treasury as Opportunity Zones. Eligibility was limited to only a portion of each state’s low-income census tracts in order to concentrate capital and increase the likelihood of meaningful economic development taking root in zones. Governors were given discretion to include moderate-income census tracts adjacent to nominated qualifying low-income ones for up to 5 percent of their nominations in order to create coherent economic zones and account for local priorities or on-the-ground idiosyncrasies. More information on the designation process and a statistical overview of designated tracts can be found in the Economic Innovation Group news article.
How were the two City of Scottsdale opportunity zones selected?
The federal Opportunity Zones program allowed each state’s governor to nominate up to 25 percent of the qualifying low-income Census tracts as Opportunity Zones. In Arizona, the governor’s office deferred to the Arizona Commerce Authority, who in turn solicited recommendations from jurisdictions throughout the state, allowing them to recommend tracts for the programs. Scottsdale had seven qualified tracts and was permitted to recommend two zones. Representatives from the City Managers office, Planning and Economic Development met and discussed the merits of nominating each of the seven zones, found here: Opportunity Zone Eligibility Map Tool. The two zones selected were determined to have the highest potential to realize the most benefits from a designation. The number of existing and possible locations for new businesses in a potential zone were taken into consideration in the selection process. The two zones the city recommended for nomination were presented to the governor’s office and ultimately approved as designated Qualified Opportunity Zones.
How do opportunity zones spur economic development? i
Opportunity zones are designed to spur economic development by providing tax benefits to investors. First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
What is a Qualified Opportunity Fund? i
A Qualified Opportunity Fund is an investment vehicle that files either a partnership or corporation federal income tax return and is organized for the purpose of investing in Qualified Opportunity Zone property.
Can a limited liability company (LLC) be an Opportunity Fund? i
Yes. A LLC that chooses to be treated either as a partnership or corporation for federal tax purposes can organize as a Qualified Opportunity Fund.
Can Opportunity Zones tax incentives be realized beyond 2026? iii
The tax incentive itself does not expire in 2026. Investors in Opportunity Funds that hold investments for at least 10 years will still be able to take advantage of the favorable tax treatment of gains related to the investments into Opportunity Funds, even if realized after 2026.
Are there minimum or maximum investments? iii
There are no minimum or maximum investments required by Opportunity Zone legislation.
Once an Opportunity Fund is established, is there a timeframe within which investments must be made? iii
This timeframe will be determined in the IRS rule making process. Based on the legislation, an Opportunity Fund may need to have 90% of its capital invested in Opportunity Zone Property within the first six months of the taxable year of the Opportunity Fund. There may be some timing relief in the rule making to enable a 12-month investment window. Also, to receive the tax benefits, the investor must deploy their capital into an Opportunity Fund within six months of realizing the capital gain being invested.
What safeguards are built in to prevent abuse? ii
Treasury is given broad authority to promulgate rules and regulations to prevent abuse of the incentive, and the Department is currently in the process of writing those rules. The statute itself includes several provisions designed to mitigate the potential for abuse and market distortion. Investors cannot simply park their money in real estate, for instance, since investors in used property are required to substantially improve it in order to receive benefits from the incentive. Treasury will conduct twice-yearly tests to ensure funds maintain at least 90 percent of their assets in qualified property and levy penalties for violations. In addition, standard related party restrictions apply to all zone and fund transactions. Tangible property and active conduct tests will prevent zones from being used as patent boxes, and entities whose assets are primarily financial, such as banks, funds of funds, or holding companies, are not eligible for investment.
Are individuals and/or businesses required to disclose to the public whether or not they are utilizing the opportunity zone program for tax benefits?
No. The Opportunity Zones program is a community development program that provides a potential tax incentive to individuals, businesses and/or investors and there is not a requirement to disclose to the general public (only to the IRS) whether or not funds invested into an opportunity zone are utilizing the program.
What is the City of Scottsdale’s role in opportunity zones?
Now that the opportunity zones have been established within the City of Scottsdale and nationwide, the city’s role in opportunity zones is strictly educational. Investments made and developments occurring in opportunity zones are not provided any preferential treatment at the municipal level over investments and developments elsewhere in the City of Scottsdale.
- i Source: Opportunity Zones Frequently Asked Questions. (2019, August 23). Retrieved from https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions
- ii Source: Opportunity Zones FAQs. (2019, January). Retrieved from https://eig.org/opportunityzones/faq
- iii Source: Opportunity Zones 101. (n.d.). Retrieved from http://www.lisc.org/our-resources/resource/opportunity-zones-101