Economic Development: Opportunity Zones
The term “Opportunity Zone” has been buzzing around for a little while but it seems like things could be ramping up. While the tax benefits associated with the program accrue at the federal level, the City of Austin is also exploring how they might be able to leverage City resources to realize greater benefits.
What are Opportunity Zones?
An Opportunity Zone is an economically depressed area designated by the federal government as one where certain investments may be eligible for federal tax incentives.
The 2017 Tax Cuts and Jobs Act included Opportunity Zone tax provisions in an effort to spur economic development and job creation in these areas by providing capital gains tax benefits to investors who invest eligible capital into qualified Opportunity Zone Funds, which are then invested in businesses, real estate, or business assets located in an Opportunity Zone.
In exchange, investors receive a deferral, decrease, and possible exclusion of capital-gain tax liabilities.
In Austin, there are 21 census tracts designated by the federal government as Opportunity Zones with the majority located east of IH-35. (The Austin City Council proposed four to the state – with all four of those in southeast Austin, and Governor Greg Abott nominated the other seventeen.) A map of the designated tracts is below and can be found online here.
What are the federal tax incentives?
There are three types of tax incentives available to investors depending upon the amount of time the funds remain within a Qualified Opportunity Fund: deferred/temporary tax deferrals, decreased capital gains, and permanently excluded capital gains.
Temporary Tax Deferral – A temporary deferral of inclusion in taxable income for capital gains realized after 2017 and reinvested into a Qualified Opportunity Fund. The deferred gain must be recognized on the date on which the Opportunity Zone investment is sold or exchanged or on December 31, 2026, whichever date is earlier.
Decreased Capital Gains/Step-Up in Basis – A step-up in basis for the deferred capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer/investor for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original deferred gain from taxation.
Permanent Exclusion – A permanent exclusion from taxable income of capital gains realized from the sale or exchange of an investment in a Qualified Opportunity Fund, if the investment is held for at least 10 years. This exclusion only applies to gains accrued on investments made through a Qualified Opportunity Fund. There is no permanent exclusion possible for the initially deferred gain.
To qualify for Opportunity-Zone tax incentives, funds must be invested and deployed from Qualified Opportunity Funds. The IRS also continuing to develop final guidance regarding the Opportunity Zone tax provisions.
Disclaimer: The Bingham Group is providing this information as a general overview. For a more detailed understanding of how this may affect your businesses’ tax liabilities, please consult a tax professional knowledgeable in this area.
What are the deadlines?
Dec. 31, 2019 – Last day to invest in Qualified Opportunity Funds to recognize maximum program benefits
Dec. 31, 2021 – Last day to invest in Qualified Opportunity Funds to realize a 10% Step-Up in Basis
Dec. 31, 2026 – Forced recognition of capital gains invested into Qualified Opportunity Funds
Dec. 31, 2028 – Federal designation of Opportunity Zones expires
What is the City doing?
In October 2018, the Council directed the City Manager to develop recommendations for leveraging available incentives and resources to encourage responsible investment that will improve the quality of life for residents in and around Opportunity Zones.
In response, Staff delivered a memo to Council in May with their recommendations. The memo sought Council direction on the extent to which the City should proactively encourage and market projects to Opportunity Zone Funds but as of late August, staff had not received direction.
In the meantime, the Economic Development Department has created a webpage about the issue, which includes links to federal resources and detailed maps of the Opportunity Zones in Austin. They are also working to identify projects within Opportunity Zones that can address community goals but are in need of investment, and provide potential matchmaking services to connect Opportunity Fund investors to these projects. They have highlighted Council’s direction to address issues such as the lack of affordable housing in Austin, food deserts, and the lack of affordable rental space for creative businesses and organizations.
Most significantly, Staff continues to develop a Location Enhancement Incentive Policy pursuant to the City’s Chapter 380 Policy, as directed by another Council resolution last year. The primary component would be a real estate gap-financing program to support the creation of “complete communities,” but Staff has remarked that expedited permitting, financing or funding of infrastructure enhancements, and zoning changes are also being considered.
Staff is procuring consulting services to assist in the outreach and development of the program and hope to bring forward a recommendation to Council before next fiscal year.
ADDITIONAL RESOURCES
City of Austin Economic Development Department Opportunity Zones webpage: http://www.austintexas.gov/department/opportunity-zones-austin
The Bingham Group can also help you understand what Opportunity Zones and Austin’s economic development policies could mean for your business. Email us at info@binghamgp.com to learn more.
//Tina Bui, Senior Consultant