Opportunity Zones were created by the 2017 tax overhaul bill. The bill transformed the way real estate and other asset classes can be handled in the industry. At first, these changes overshadowed the bill’s Investing in Opportunity Act, the act responsible for creating Opportunity Zones. Opportunity Zones were formed to revitalize economically disadvantaged communities through private investments instead of taxpayer money.
Where are Opportunity Zones?
To qualify as an Opportunity Zone, a community needs to meet the criteria in the 2017 Tax Cuts and Jobs Act. There are Opportunity Zones in all 50 states, as well as in the five U.S. possessions, including Puerto Rico.
Up to 25% of all low-income neighborhoods that meet the qualifications become an Opportunity Zone. Once an area becomes a designated Opportunity Zone, they retain the status for ten years. Over 8,700 Qualified Opportunity Zones have already been created.
How Were They Created?
To become an Opportunity Zone, an area needed to complete a nomination and designation process. Governors were responsible for nominating census tracts in their jurisdictions that met specific low-income requirements. Their requirements included a poverty rate of at least 20% or a median family income of less than 80% of the statewide median family income for census tracts within metropolitan non-metropolitan areas. The governor could nominate up to 25% of the areas that meet these requirements defined by the U.S. Internal Revenue Code Section 45D(e).
According to these requirements, 57% of neighborhoods in the United States could have been considered to become Opportunity Zones.
Why Were the Created?
Opportunity Zones were created with the goal of stimulating private investments in exchange for capital gain tax incentives. In previous years, the government used taxpayer money to develop tracts. Now, the new system will stimulate the investment of an estimated $6.1 trillion of unrealized private gains. These programs are less expensive and restrictive than the previous method. Opportunity Zones are also far less reliant on government agencies, which frees them up to function better. When investors choose to invest in Opportunity Zone communities, they receive immediate tax incentives, as well as long-term incentives. As another benefit, there is no cap on the amount of money that investors can put into the properties, giving investors even more freedom to help improve communities around the country.