OZ Pitch Day - March 7, 2024
Updated January 22, 2024
Opportunity Zones are a powerful yet time-limited tax incentive, driving the most significant economic development initiative in U.S. history.
The incentive gives investors a new way to generate unlimited tax-free growth, making it the greatest tax-advantaged investment program ever created.
The Opportunity Zone tax incentive was enacted as part of the Tax Cuts & Jobs Act of 2017. It is a bipartisan place-based economic development policy that incentivizes long-term investment in economically distressed communities all across the United States.
There are multiple tax benefits for U.S. taxpayers with capital gains who invest in Opportunity Zone locations, but the major benefit is this: once an investor achieves a 10-year holding period within an Opportunity Zone investment, the gain from the sale of the investment is 100% tax-free.
Real estate developers and entrepreneurs are using Opportunity Zones to attract equity investors into their projects.
High Net Worth investors, family offices, and financial advisors are using Opportunity Zones to invest in highly tax-advantaged real estate and venture capital deals — and achieve unlimited tax-free growth.
By 2022, Opportunity Zones had already attracted over $100 billion in equity investment.
What Constitutes An Opportunity Zone Investment?
In order to incentivize private capital investment into economically distressed areas, the federal government (and numerous conforming state governments) offer powerful tax benefits for Opportunity Zone investors. But there are some requirements that investors should be aware of.
Firstly, only eligible gains (including capital gains and qualified 1231 gains) that are timely invested into Qualified Opportunity Funds are able to receive preferential tax treatment.
And, in order to qualify as an Opportunity Zone investment, the underlying asset must satisfy a number of requirements, including (but not limited to):
- The asset must be physically located in a Qualified Opportunity Zone.
- The asset must drive new economic activity in the community, either by satisfying the “original use” requirement, or the “substantial improvement” requirement. It cannot simply be an existing asset that goes unimproved.
The underlying project can be funded like any ordinary asset – with a combination of equity, debt financing, and tax credits. Opportunity Zone projects can form a Qualified Opportunity Fund as a wrapper for the OZ equity portion of the capital stack.
Equity investors in an Opportunity Zone asset can achieve the tax benefits of OZ investing by reinvesting eligible gains dollars into a Qualified Opportunity Fund that then deploys the dollars into the asset.
Qualified Opportunity Funds
To receive the preferential tax treatment that Opportunity Zone investing offers, investments must flow through an investment vehicle newly created in the Opportunity Zones legislation — the Qualified Opportunity Fund.
Qualified Opportunity Funds can be structured as corporations or partnerships. They must invest substantially in: 1) Qualified Opportunity Zone Businesses (QOZBs) that hold Qualified Opportunity Zone Business Property (QOZBP), 2) Qualified Opportunity Zone Property (QOZP) directly, or 3) a combination of the two. In general, a Qualified Opportunity Fund must hold at least 90 percent of its assets in QOZBs or other QOZP.
Certain “sin” businesses (golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks or other facilities used for gambling, and liquor stores) are prohibited as qualifying assets under the Opportunity Zone legislation.
Opportunity Zone Facts And Figures
On June 14, 2018, the U.S. Treasury and IRS finalized certification of the Opportunity Zones. In total, 8,762 census tracts were certified as Qualified Opportunity Zones. These zones are located in all 50 states, the District of Columbia, and all five inhabited overseas territories. In December 2018, new data from the Census Bureau allowed for Puerto Rico to be granted two additional Opportunity Zones, bringing the final total to 8,764.
A total of 8,534 out of 31,866 census tracts defined as low-income were designated as Opportunity Zones. An additional 230 eligible contiguous tracts (not defined as low-income) were designated as well.
Nearly 35 million Americans live in these zones, per 2015 American Community Survey data. The average poverty rate in the Opportunity Zones is 32 percent, compared to 17 percent for the average census tract.
Technical Opportunity Zone Terminology
Qualified Opportunity Zone (also known more simply as Opportunity Zone, QOZ, or OZ) — A census tract (geographic location) based on the 2010 census map that has been certified as a Qualified Opportunity Zone by the IRS.
Qualified Opportunity Fund (QOF) — An entity (typically an LLC taxed as a partnership, or a corporation) that self-elects via IRS Form 8996 annually to be treated as a Qualified Opportunity Fund, and serves as an investment vehicle through which OZ-eligible gains need to flow into. In order to remain in compliance, a QOF needs to deploy at least 90% of its capital into Qualified Opportunity Zone Property (QOZP), among other requirements.
Qualified Opportunity Zone Property (QOZP) — Qualified Opportunity Zone stock, a Qualified Opportunity Zone partnership interest, and/or Qualified Opportunity Zone Business Property (QOZB), i.e. the underlying asset that is receiving the investment.
Qualified Opportunity Zone Business (QOZB) — An active trade or business in which at least 70% of the tangible property owned or leased by the corporation or partnership is Qualified Opportunity Zone Business Property (QOZBP).
Qualified Opportunity Zone Business Property (QOZBP) — Tangible property used in a trade or business of the QOZB. In order to qualify as QOZBP, 1) the property must have been acquired by the QOZB after December 31, 2017; 2) the original use of the property in a qualified opportunity zone (QOZ) starts with the QOZB, or the QOZB substantially improves the property, and 3) substantially all of the use of the property was in a qualified opportunity zone during substantially all of the time the QOZB held the property.
IRC Section 1400Z — The Internal Revenue Code Section that codifies Opportunity Zone designation and tax treatment of Qualified Opportunity Funds. Enabled by the enactment of the Tax Cuts & Jobs Act of 2017.
Table Of Contents: Opportunity Zones Explained
- Chapter 1: Opportunity Zones Explained — The basics of the OZ program.
- Chapter 2: Opportunity Zone Tax Benefits — How the OZ tax break works.
- Chapter 3: A Brief History Of Opportunity Zones — Policy background on the OZ legislation.
- Chapter 4: Where Opportunity Zones Are Located — Includes the map of Opportunity Zones.
- Chapter 5: Two Ways To Invest In OZs — Active vs. passive options for investing.
- Chapter 6: How To Invest In Opportunity Zone Funds — QOF investments for passive LP investors.
- Chapter 7: How To Start Your Own OZ Fund — How to create a self-managed OZ fund.
- Chapter 8: Opportunity Zones vs. 1031 Exchanges — Two popular tax deferral programs.
- Appendix: The Best Opportunity Zone Resources To Learn More — Recommended links.