OKCís Opportunity Zones provide incentives for investment
What, exactly, is an Opportunity Zone?
An Opportunity Zone is a designation created by the Tax Cuts and Jobs Act of 2017 allowing for certain investments in lower income areas to have tax advantages. The purpose of this program is to put capital to work that would otherwise be locked up due to the asset holder's unwillingness to trigger a capital gains tax.
The zones were proposed by U.S. Sen. Tim Scott and supported by Sean Parker's Economic Innovation Group. States may designate up to 25 percent of low-income census tracts as Opportunity Zones.
An investor who realizes certain capital gain income may reinvest the capital gain in an Opportunity Fund within 180 days.
In order to qualify, the Opportunity Fund needs to invest more than 90 percent of its assets in Qualified Opportunity Zone Property that is located in an Opportunity Zone. The property must be significantly improved, which means it must be an original use or the basis of the property must be doubled of the basis of the non-land assets. Capital gain taxes are deferred for investments reinvested into investments in these zones and, if the investment is held for ten years, all capital gains on the new investment are waived.
An investor will need to invest in an Opportunity Fund by the end of 2019 in order to meet the seven-year holding period and be able to exclude 15 percent of the deferred capital gain. An investor may exclude 10 percent of the deferred capital gain by investing in an Opportunity Fund by the end of 2021 in order to meet the five-year holding period.
The first Opportunity Zones were designated in April 2018.
Prior to the law allowing Opportunity Zones, an investor could defer capital gains taxes by trading one asset with another asset in the same asset class by using a Section 1031 exchange. Opportunity Zones now allow an investor to defer capital gains taxes by trading one asset with another asset in a different asset class.
In Oklahoma City, eight areas have qualified as Opportunity Zones, offering incredible potential for development in some of the city's key geographical areas.
A panel of Opportunity Zone experts recently addressed more than 200 of Oklahoma City’s business leaders during a Chamber Forum luncheon, discussing those investment opportunities, how they can be taken advantage of and how they will impact neighborhoods in areas throughout Oklahoma City.
“It's not just for housing, it's not just for business, it's not just for real estate. It can be used across the gamut,” said Cheryl Denney, shareholder, practice and industry group leader at McAfee & Taft. “It's obviously a very big topic of interest in the community.”
How were OKC’s Opportunity Zones chosen?
“We did receive some guidance from the State Department of Commerce about the number of census tracts we could include and how they wanted us to focus,” said Cathy O’Connor, president & CEO of the Alliance for Economic Development of Oklahoma City. “Basically, we were focused on Oklahoma County, identifying the low income communities where we thought it was most likely to see investment within that ten year time horizon that's mentioned in the federal law.
So we convened a group, of people from the City Planning Department, some developers, some experts about how the program would work. And we set about trying to identify the census tracts that we thought were most likely to create the most benefit for Oklahoma City.”
Those areas include the central business district, the innovation district, the northeast 23rd Street corridor, I-35 corridor, the I-35 and I-240 intersection, the I-40 corridor, the I-44 and I-235 intersection and the adventure district.
Scott Meacham, president and CEO of nationally recognized start-up i2E shared his insight on what was behind the creation of Opportunity Zones.
“I think, you know, if you go back to the policy, what Congress was trying to do was to unlock capital gains and get them deployed in areas that they viewed needed economic development. Well, an easy and probably the simplest application right now is in real estate. There's actually regulations out for real estate. They actually made them kind of investor-friendly.”
Okay, it’s obviously trending right now. But how does it work? Glad you asked.
First, the investment has to be made by a taxpayer that has a capital gain from another event. So, if you think about a taxpayer who has, for example, Microsoft stock that they want to sell, or has another building that they want to sell and they then engage in that transaction, that generates a capital gain. And they can elect to defer that capital gain, but only if they take that capital gain and within 180 days invest in an opportunity zone fund.
What happens after 180 days?
“Within 180 days you have this other event. You've been 180 days, you take it and you put it into the fund, and the fund can be self-certified, and the fund, basically it's an entity that has 90 percent of its assets invested in Opportunity Zone property,” said Denney. “Opportunity Zone property is essentially two things; it can be equity in another business that is itself a qualified Opportunity Zone business, or it can be real property that's located in a qualified Opportunity Zone. They wanted people to bring new capital in to the Opportunity Zones, so it's not just enough to buy an office building that's in an Opportunity Zone. You have to come in and be willing to substantially improve that property or build a new business in an Opportunity Zone, so that's one thing that a lot of people don't realize.”
Why should anyone consider investing in an Opportunity Zone?
“You've sold your Microsoft stock, you invested in an Opportunity Zone Fund within 180 days, now you get to defer the capital gain on that till the end of 2026 or earlier if you sell your investment in the opportunity zone fund,” Denney explained. “That's the first big benefit, you get the deferral of capital gain. If you hold the investment in your Opportunity Zone Fund for five or seven years, did you get an adjustment in basis? So when you do sell, when that 2026 date does come around and you have to pay that tax, then you pay less tax than you would have otherwise paid. And then, the final benefit, which is the one that's considered to be the most beneficial, is that investment that you have in the Opportunity Zone Fund. If you hold it for ten years and then you sell it, then whatever capital gain is generated by that transaction is not taxable, so long as that transaction comes before the end of 2047.”
Sarah Roberts, program officer for the Inasmuch Foundation, an Oklahoma City-based grant-making foundation that provides financial contributions to projects focusing on education, health and human services, arts, historic preservation and environmental concerns, is excited about the potential to help low-income populations or at-risk families.
“I think just overall strategically we really are excited about the idea of inclusive economic development,” she said. “I'm sure many of you were at the State of the City and I think we have a new mayor in Mayor Holt who currently is really promoting inclusive economic development. And so, I think the foundation and other philanthropic partners that we bring to the table are just really excited and to see this economic development be more inclusive than it ever has been historically.”
“To me, that is the real power in the social side of this,” added Meacham. “The ability to do some of those kinds of things in these traditionally, blighted areas. You know, maybe it's a housing project where housing deals didn't really work as well before or something like that.”
The bottom line? Just as the phrase Opportunity Zone implies that there must be an opportunity. Each of the zones in Oklahoma City offers different potentials for meeting some goals of improving lower-income neighborhoods and providing return on invested funds.
That’s a win-win for investors and Oklahoma City.