The Opportunity Zone program, the largest economic development incentive in a generation, is a tax incentive aimed to attract long-term, value-add investment in economically distressed communities through a capital gains tax advantage. In 2018, 4,000 low-income census tracts across the country were designated “Opportunity Zones.”

If an investor has a capital gain, and invests the gain amount in a Qualified Opportunity Fund (QOF), there are two potential core benefits:

• Defer current capital gains tax owed until 12/31/2026

• No tax owed on new earned gains from the disposition of the QOF interest or the underlying assets after 10 years of holding the QOF interest

A person is eligible to make an investment intended to qualify for Opportunity Zone tax benefits if the person:

• Has realized a capital gain within the last 180 days; and

• Invests the gain in a QOF, an investment vehicle set up to invest in Opportunity Zones.

Thousands of low-income communities in all 50 states, the District of Columbia, and five U.S. territories are designated as Qualified Opportunity Zones.

map

An interactive map of all Opportunity Zones can be found here.

Opportunity Zone investments can be in real estate or operating businesses located within a QOZ but must be made through a Qualified Opportunity Fund (QOF).

For real estate investments, an important test for many potential investments is what is known as the “substantial improvement test.” This provision in the program was included to ensure that substantial cash (and jobs) benefits target communities through value-add investment.

How this practically works is for each $1 a project is worth at the time of acquisition (excluding the land value), the developer will need to invest another $1 in renovation or development. So, if a developer acquires a property for $5, with a building worth $4 and land worth $1, the developer needs to invest an additional $4 in renovations for the project to qualify. New development deals inherently qualify, as new vertical development costs meet the test.

If the investment is held in a QOF for at least 10 years, it may be eligible to permanently exclude capital gains resulting from the qualifying investment when sold or exchanged.

Funds affiliated with Blueprint Local have invested equity in over 20 Opportunity Zone projects across the Southeast, Texas, and Mid-Atlantic that focus on building and revitalizing communities. Examples include:

• Development of dynamic mixed-use neighborhoods, such as The Current, a development in downtown Richmond that combines mixed-income housing, new office space, and Hatch Local, a food hall for local entrepreneurs, and The Pass, a transit-oriented development of an abandoned 12-acre industrial yard in north Charlotte

• Creation of workforce-affordable multifamily housing in growing cities like Austin, Houston, Atlanta, and Raleigh.

The US Government Accountability Office, EIG (a think tank that was an early educator on Opportunity Zones) and Novogradac (a tax and accounting firm) conducted early evaluations and surfaced key outcomes:

• The OZ incentive is the largest economic development program in a generation, supporting at least $60 billion in investment in economically distressed areas over the past five years. All of this capital is private sector capital, so the economic stimulus is at no cost to the taxpayer.

• The 2018 designation process succeeded in targeting high-need communities nationwide: the median household income in Opportunity Zones is half the national median income, and the poverty rate is double the national rate.

• State and local elected officials overwhelmingly have a positive view of the policy.

• Firms surveyed indicate that the OZ incentive is driving investment that would not have otherwise occurred within targeted communities.

• Transparency and reporting on the program’s impact could be improved and are being addressed in follow-up legislation that is currently proposed and sponsored by both parties in both Houses of Congress.

In 2022, Senators Tim Scott and Cory Booker led a bipartisan, bicameral group of Senators and Representatives to extend the program and add transparency and impact reporting, and proposed legislation continues to be evaluated and considered.