What are Opportunity Zones?
Opportunity Zones were enacted as part of the 2017 federal Tax Cuts and Jobs Act and are designed to drive long-term capital investments into low-income rural and urban communities. This federal capital gains tax incentive encourages private investors to support investments in designated low-income distressed communities (Opportunity Zone census tracts) through participation in Qualified Opportunity Funds.
What’s an Opportunity Fund?
An Opportunity Fund (or Qualified Opportunity Fund) is a special vehicle to invest in Qualified Opportunity Zone Property. Opportunity Funds must hold at least 90 percent of their assets in Qualified Opportunity Zone stock, partnership interests, or business property. To receive the tax incentives, capital gains must be invested in Qualified Opportunity Funds within 180 days of the date of sale or exchange producing the gains.IRS Notice 2021-10 now automatically postpones the 180-day reinvestment deadline to March 31, 2021 if the deadline falls between April 1, 2020 and March 31, 2021.
How were New Jersey’s Opportunity Zones designated?
Designated census tracts were based upon a formula incorporating the Municipal Revitalization Index (MRI) which reflects key economic indicators (e.g. income, unemployment rate, property values), that also takes into consideration geographic distribution, access to transit, and the value of existing investments, including those encouraged by state programs and incentives. To ensure a fair and transparent selection process, feedback and input was received from mayors throughout the state and the New Jersey Congressional delegation prior to the Governor’s Office making the final designation of state Opportunity Zones.
How many Zones were created?
169 census tracts in 75 municipalities were nominated on March 20, 2018 and approved by the US Department of the Treasury on April 9, 2018.
Can additional Census Tracts be designated as Opportunity Zones?
No, all of New Jersey’s designations have been accepted and approved by the US Department of the Treasury and no substitutions or additions are allowed. Opportunity Zone boundaries cannot be moved either.
Where are New Jersey’s Opportunity Zones?
75 municipalities, representing every county in New Jersey, received at least one Opportunity Zone.
Click here for a list of municipalities with Opportunity Zones
Click here for a list of Opportunity Zone census tracts
Click here for an interactive map of Opportunity Zones
Click here for a PDF map of Opportunity Zones
How do Opportunity Zones work?
Taxpayers can defer paying federal taxes on capital gains (including those from real estate sales) invested in Qualified Opportunity Funds that invest in low-income communities, under rules released by the U.S. Department of the Treasury. There are three separate benefits offered by this tax incentive:
- Reinvested capital gains are deferred from taxation until exit from a Qualified Opportunity Fund or December 31, 2026, whichever comes first.
- The original capital gains reinvested in Qualified Opportunity Fund investments held for the long term receive a reduction in capital gains tax liability, discounted by 10% at the 5-year mark and by an additional 5% at the 7-year mark.
- Any new gains from Qualified Opportunity Fund investments held for at least 10 years are permanently excluded from the capital gains tax. These Fund investments can be held through as late as 2047 without losing tax benefits.
How does the 10-year minimum for the capital gains tax exclusion relate to the December 31, 2026 deadline?
The December 31, 2026 deadline relates to the maximum period the original capital gains can be deferred from taxation. It does not affect the timing of when the additional capital gains from investing in a Qualified Opportunity Fund can be excluded from taxation. For example, an investor that reinvests capital gains in a Qualified Opportunity Fund in 2018 would have to pay federal taxes on the original gains by December 31, 2026. But that investor could sell his or her interest in the Fund as early as 2028 or as late as 2047 and pay no tax on the additional gains from the Fund investment.
Who can set up and manage a Qualified Opportunity Fund?
Any eligible taxpayer can set up a Qualified Opportunity Fund. Taxpayers self-certify by completing a special form (IRS Form 8996, Qualified Opportunity Fund) and attaching it to their federal income tax return for the taxable year. There are currently no federal guidelines or limitations on who can manage a Qualified Opportunity Fund. More detailed draft guidelines on setting up an Opportunity Fund and making investments were released by the US Department of the Treasury on October 19th, 2018.
How can I take advantage of Opportunity Zones for my business or project?
You can either set up your own Qualified Opportunity Fund, paying careful attention to the federal rules and requirements, or attract investment from an existing Qualified Opportunity Fund.
I would like an Opportunity Fund to invest in my business or project. How do I find them?
New Jersey has developed an online tool to connect communities, businesses, and project opportunities with a national network of investors and project partners. The Opportunity Zone Marketplace provides a platform to discover and promote real estate and business opportunities, network with investors, developers, stakeholders, local leaders, and service providers, and pursue projects shaping the future of New Jersey communities.
Who can invest in a Qualified Opportunity Fund?
Any federal taxpayer, including individuals, businesses, and corporations, can invest in an Qualified Opportunity Fund. However, the investments must consist of capital gains reinvested during the 180-day period beginning on the date of the sale or exchange giving rise to the gain. Investments must take the form of an equity interest, including preferred stock or a partnership interest with special allocations. They cannot take the form of a debt instrument.
Can a Qualified Opportunity Fund invest in multiple Opportunity Zones?
Yes, there are no limitations on the number of Opportunity Zones an Qualified Opportunity Fund can invest in.
Can other federal, state, and local tax incentives be paired with Opportunity Zone investments?
Yes, federal, state, and local tax incentive programs can be combined with Opportunity Zone investments to further enhance the viability of projects.
Can a property that I already own qualify for Opportunity Zone tax incentives?
Yes, under the right circumstances. Qualified Opportunity Funds can invest in qualifying property within Opportunity Zones if the property meets the following conditions:
- Was purchased by the Fund after December 31, 2017. The Opportunity Zone statute limits the definition of “purchase” to not include a purchase from any related party whose interest in the property exceeds 20 percent.
- Is used in a trade or business (including rental real estate) of the Fund
- Has an original use commencing with the establishment of the Fund or the Fund’s investment in that property “substantially improves” the property, meaning the Fund needs to double its adjusted basis in the property no later than 30-months after acquisition. IRS Notice 2021-10 excludes April 1, 2020 through March 31, 2021 from the determination of this 30-month period, providing an additional 12 months to improve the property. Changes in land values do not have to be factored into the doubling of the adjusted basis for real estate investments.
Original use occurs when the property is placed in service that would start depreciation or amortization if being used in a trade or business. Vacant property qualifies as original use property if it was vacant for an uninterrupted period of three years beginning after the Opportunity Zone designation date (June 14, 2018) or the property was vacant at least one year prior to the designation date and remained vacant through the date of the purchase.
- “Substantially all” of the use of such property (defined as 70 percent in the regulations) will be in Opportunity Zones for the Fund’s holding period
Is a project that borders or is close to an Opportunity Zone eligible for capital gains tax incentives?
No, investments must be made within the boundaries of one or more Opportunity Zones in order to receive tax incentives. However, Qualified Opportunity Funds can invest up to 10% of their assets in areas outside Opportunity Zones and Qualified Opportunity Zone Businesses can have up to 30% of their assets outside Opportunity Zones.
Are Opportunity Zones investments limited to new construction real estate projects?
No, Opportunity Zone investments can take many forms. Investments can be made in qualified opportunity zone stock, partnership interests, or business property held by Qualified Opportunity Funds. Business property can include real property but also equipment and other forms of tangible personal property.
Would farmland or vacant, undeveloped land qualify for capital gains tax incentives?
Yes, possibly. If it is within an Opportunity Zone and meets the criteria on purchase date, use in a business or trade, and original use timing or substantial improvement, it could potentially qualify.
Can projects from community-based non-profits qualify for Opportunity Zone incentives?
Yes. Opportunity Zones offers community-based non-profits a chance to obtain additional investment from private investors with capital gains, for projects that would produce a financial return on investment. However it is important for any community-based non-profit to consider the relative cost of Opportunity Fund capital relative to their other sources of funding. These projects would still need to meet the minimum criteria for Opportunity Zone investments.
What is the State’s role with Opportunity Zones?
The State will play a role in helping to ensure all New Jersey’s Opportunity Zones receive opportunities for investment that are equitable and inclusive. This includes special technical assistance for Opportunity Zone municipalities in planning for and promoting their Zones, assistance to small, minority and women owned businesses within Opportunity Zones, loans and tax incentives offered by existing State programs, and tools, resources, and guides for businesses, developers, and investors interested in the Zones.
How can my community benefit from Opportunity Zones?
Opportunity Zones will make business and real estate development projects in your community more attractive to private investors through a higher effective rate of return on investment through Opportunity Zones’ significant tax incentives. For projects that require equity investment, this makes it easier to obtain the financing needed to advance stalled projects and support the growth of local businesses.
Will Opportunity Zones just lead to gentrification?
It is expected that Opportunity Zones will attract all kinds of investment to low-income communities, including some that could eventually increase the cost of housing and displace residents. To mitigate this, the State of New Jersey will support municipalities and community residents and organizations in efforts to promote inclusive and equitable development that yields quality housing opportunities for residents.
I have more questions. How can I find more information about Opportunity Zones?
For more information on the federal rules, contact the IRS at (414) 231-2240 or CC.ITA.Section.firstname.lastname@example.org. For more information on New Jersey’s Opportunity Zones, contact us at email@example.com.