The recently enacted federal tax reform legislation permits the US Treasury to designate up to 25% of a state’s low wealth census tracts and up to 5% of non-low wealth consensus tracts contiguous to low wealth districts to be Opportunity Zones. Designated census tracts determined to be Opportunity Zones encourage private sector investment by offering:
- A temporary tax deferral for capital gains reinvested in an Opportunity Fund– the deferred gain is recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026.
- A step-up in basis for capital gains reinvested in an Opportunity Fund– the basis of the original investment is increased by 10% if the investment in the qualified opportunity zone fund is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years, excluding up to 15% of the original gain from taxation.
- A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years.
State Governors have until March 21, 2018, to submit a list of eligible census tracts to the US Treasury Department for their consideration to be designated as Federal Opportunity Zones. State economic development agencies are likely on point to make recommendations to their Governors for which census tracts will be recommended to the US Treasury. Some states are utilizing technology to manage the process and a chart outlining a number of state web site links and submission dates are below.
Sample of Governor Opportunity Zone Submission Applications and Deadlines
|State||Submission Web Link||Deadline|
|Missouri||https://ded.mo.gov/content/opportunity-zones||March 2, 2018|
|Ohio||http://odsa.force.com/ozf||March 2, 2018|
|West Virginia||http://westvirginia.gov/opportunity-zones.html||March 7, 2018|
|Colorado||https://choosecolorado.com/oz/||February 28, 2018|
|Idaho||https://commerce.idaho.gov/communities/opportunity-zones/||March 2, 2018|
|Mississippi||https://www.mississippi.org/opportunity-zone-application/||March 7, 2018|
These web site will likely not be the vehicle that decides which census tracts are recommended but merely a method to gather the information. It will be a highly competitive process to choose eligible census tracts for this program– the City of Cleveland alone has over 200 eligible census tracts but the state of Ohio can only choose just over 330 census tracts.
Likely census tract selection criteria could include:
- The law sets a ceiling for the total number of tracts that may be nominated in each state, but Governors could choose fewer to better target resources.
- States must conform to the Low-Income Community federal standard as a baseline for zone designations but are free to establish additional criteria to reflect local needs and priorities.
- Zones can be a single census tract or a much larger grouping of contiguous tracts.
- Congress advised governors to give particular consideration to areas that:
- Are currently the focus of mutually reinforcing state, local, or private economic development initiatives to attract investment and foster startup activity;
- Have demonstrated success in geographically targeted development programs in the past, such as Promise Zones, New Market Tax Credits, Empowerment Zones, or Renewal Communities; and
- Have recently experienced significant layoffs due to business closures or relocations.
- Governors may choose to focus investment where the market is most likely to invest by looking at an area’s absorptive capacity for new capital, habitability for local entrepreneurs, and connection to markets, population centers, and anchor institutions.
- The federal law does not restrict uses within the census tracts which means retail and housing, and job creating uses are permitted but Governors could choose to limit the types of uses permitted.
- The federal law does not state requirements for geographic balance in a state but Governors will likely look to spread out the recommended census tracts to all parts of the state and include both urban and rural communities.
Communities, developers and companies can participate in this process in a number of ways that include advocating with the state Governors, promoting the Opportunity Zone Program in their region, creating regional Opportunity Funds to be submitted as one project in the hopes of winning the census tract designation but also forming projects more likely to succeed, and forming Opportunity Funds to support investment these designated Census Tracts.