Federal Opportunity Zones: What Local Governments Need to Know

<p>Opportunity Zones are the latest effort by the federal government to encourage investment in low-income census tracts. The Tax Cuts and Jobs Act, enacted at the end of 2017, grants significant tax benefits to investors who reinvest their capital gains in designated “Opportunity Zones.” The market potential is enormous, with some analysts estimating that trillions of dollars could be available for investment in these zones. The U.S. Department of Treasury has certified more than 8,700 Opportunity Zones nationwide and 252 in North Carolina. Local governments are now asking what they can do in order to take full advantage of the investment potential. This post answers some common questions asked by local government officials about Opportunity Zones and offers advice for next steps.</p> <p>How do Opportunity Zones (OZs) work? </p> <p>When a private investor sells property (real estate, stock, etc.) and earns a capital gain, the investor must typically pay federal capital gains taxes. For high-wealth investors, the capital gains tax rate can be assumed to be 20% of the gain (for 2018). However, if the investor instead turns around and reinvests the capital gain into designated “opportunity zone property,” then the capital gains taxes due are deferred. That is, the investor doesn’t have to pay those capital gains taxes until 2026 or the year the Opportunity Zone (OZ) property is sold, whichever is sooner. The longer the investor holds on to the OZ property without selling it, the greater the benefits.</p> After holding the OZ property for 5 years, the deferred taxes are reduced by 10%. In [...]