The Pros and Cons of Investing in Opportunity Zones
Want to get an equity investors attention? Say the words “no capital gains tax” and there is a good chance you’ll earn instant eye contact. Or at least that is what legislators were banking on when they drafted the Investing in Opportunity Act.
What is the Investing in Opportunity Act?
The Investing in Opportunity Act was introduced in the Tax Cuts and Jobs Act of December 2017. It provides tax incentives for equity investors putting capital to work in certain economically distressed areas — known as “opportunity zones.” There are approximately 8,700 zones in total.
Opportunity zones are generally “more demographically diverse than the nation as a whole, with a 56 percent share of minority residents compared to 38 percent nationwide,” according to the Economic Innovation Group, which worked with Senator Tim Scott (R-SC), Senator Cory Booker (D-NJ), Representative Pat Tiberi (R-OH), and Representative Ron Kind (D-WI) to push the legislation.
Opportunity Zone Pros
The Opportunity Zones Program offers three tax incentives for investing in Opportunity Zones.
1. Temporary Deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund
2. Step-Up In Basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10 percent if the investment in the Opportunity Fund is held by the taxpayer for at least five years and by an additional five percent if held for at least seven years (excluding up to 15 percent of the original gain from taxation)
3. Permanent Exclusion from capital gains tax related to the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years.
For more details and several example scenarios of after-tax funds, check out this fact sheet. These incentives already have some investors very excited and looking for “opportunities.”
Opportunity Zone Cons
The legislation was put together quickly and there is still some confusion around how it will work. According to the New York Times, guidance from the Treasury Department, released in April 2019, both helped to clarify how investments in these zones would work and acted as a green light for managers raising money for Opportunity Funds.
Critics of the program have serious concerns that Opportunity Zones will become fast track passes to gentrification, rather than true investments in low-income communities. “If history has anything to say about it, opportunity zones won’t actually yield such wide-reaching benefits. To be sure, developers will benefit from the tax incentives. So will wealthy taxpayers across the country who stand to receive tax breaks as a reward for investing in opportunity funds. But there’s not much reason to think that poor communities will benefit from these investments,” said Michelle D. Layser, University of Illinois College of Law.
Symmetrical assists Middle Market companies strategically assess their options and prepare for big transitions. If you are curious to learn more about the pros and cons of opportunity zone investments, please contact us for a confidential discussion about how we can help.