Property developers are excited to invest in Opportunity Zones, federally-designated areas where they can get a significant tax break on the real estate. Many of the Opportunity Zones are located in areas that were already of interest to developers. There is no need for governmental approval, a significant reduction in red tape compared to prior tax incentive programs.
In 2017, Congress created significant tax incentives for investment in Opportunity Zones. The program provides a federal tax incentive for investors, who invest in real estate projects and operating businesses located in designated low-income communities. The tax benefits potentially available are deferral of the taxpayer’s original capital gain, elimination of up to 15% of deferred capital gain, and elimination of gain from sale of the investment in the Qualified Opportunity Fund.
Investors interested in taking advantage of Opportunity Zone tax benefits must invest realized capital gains into a Qualified Opportunity Fund within 180 days that the capital gains are realized. The tax benefits associated with a Qualified Opportunity Fund (QO Fund) are:
- After five years, 10% of the deferred gain is eliminated.
- After seven years, another 5% of the deferred gain is eliminated.
- Investors can defer tax on any prior gains invested in a QO Fund until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026
In addition, if the investment in the QO Fund is held by the taxpayer for ten years, any gain from the eventual sale of the investment in the QO Fund is free from tax.
According to the IRS, investors are required to invest into a building at least as much capital as they acquired it for. Additional capital to improve or develop the asset must be invested during any 30-month period. All QO Fund’s have until Dec. 31, 2019, to close on the property within the Opportunity Zone if they intend to take full advantage of capital gains deferments. That’s when the chance to receive the full benefit of the seven-year, 15 percent capital gains tax deferment expires.
Governor Larry Hogan recently proposed spending $56.5 million to support economic development and business creation in Maryland’s Opportunity Zones. Hogan said the proposed state initiatives “will foster an environment of economic opportunity, create thousands of new jobs, revitalize and literally transform communities and neighborhoods all across Maryland that need our help the most.” There are 149 Opportunity Zones in Maryland. The top 3 Maryland counties with the most Opportunity Zones include Baltimore City (42), Prince George’s (25) and Montgomery (14).
Nearly 30 percent of Maryland’s opportunity zones are in Baltimore City, where the program is expected to help ongoing efforts to reduce the number of vacant houses and boost employment. The zones are spread throughout the city and include some areas already slated for redevelopment. For a list of Baltimore’s 42 Opportunity Zone Census Tracts, as indicated by the Baltimore Development Corporation, click here.
The innovations of the Opportunity Zones program offers excellent potential to help lift economically distressed communities. Stay tuned as the Treasury is expected to release more guidance soon on issues that were not addressed in this first release.