A little-debated component of the Tax Cuts and Jobs Act of 2017 is a new community development program known as Opportunity Zones. The program, which is based on the bipartisan Investing in Opportunity Act, is intended to steer long-term, private-sector investments to low-income, high-poverty urban and rural communities across the country. The program provides a range of tax incentives (temporary tax deferral, step-up in basis, and permanent exclusion) for investors to re-invest their unrealized capital gains into Opportunity Zones that are dedicated to investing in distressed communities that lag behind major cities in economic growth and job creation. This legislation is intended to allow more regions of the country to enjoy the levels of economic growth traditionally enjoyed by prime urban conglomerates, such as Los Angeles and New York.
Many of these stronger metropolitan regions have seen a disproportionate percentage of population, economic growth, and accumulation of wealth and capital relative to other urban and rural areas across America.
Opportunity Zone Designation
Opportunity Zones are designated by the chief executives of every U.S. state and territory. The program requires governors in each state and the mayor of the District of Columbia, by March 21, 2018, to designate 25 percent of their state’s low-income census tracts as Qualified Opportunity Zones, subject to certification by the U.S. Department of the Treasury (Treasury). A low-income census tract, as defined by the Internal Revenue Service, is any tract in which the poverty rate is at least 20 percent or the median family income is at or below 80 percent of the greater of the statewide or metropolitan area median family income. Opportunity Zone designations last for a period of 10 years.
According to data provided by Treasury, 3,512 Low-Income Community Tracts across the State of California are eligible for designation as Qualified Opportunity Zones. From this pool of census tracts, 878 tracts have been nominated by the California Department of Finance for the status as Qualified Opportunity Zones.
The underlying incentives provided through the program are predicated upon preferential treatment of capital gains on sale of real estate assets when these gains are reinvested into a qualified Opportunity Zone. For investors who hold their investment for 10 years or more, the tax benefit grows. The program defers the taxable income for capital gains invested, and the basis of the investment is increased by 10% if the investment in the Opportunity Zone is held by the taxpayer 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 gain from taxation.
The amount of capital gains resulting from the sale or exchange of the new investment in the Opportunity Zone is fully exempt from capital gains tax if the investment in the Opportunity Zone is held for at least 10 years.
If this new program succeeds, they could help revitalize neighborhoods and communities that are starved for investment. LDC will continue to monitor the development of Opportunity Zones and share news and research on their impact on housing and economic development.
Liz Tracey is an expert on affordable housing and community development finance using tools such as the Low Income Housing Tax Credit and New Markets Tax Credits. For information about Opportunity Zones, and other community development financing resources, contact Liz Tracey, Senior Principal, LDC at firstname.lastname@example.org.
Reza Mortaheb is an architect, urban planner, and urban researcher who monitors how federal and state housing policy affects housing affordability and community development.
 The Investing in Opportunity Act (IIOA) was championed in 2017 by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and Representatives Pat Tiberi (R-OH) and Ron Kind (D-WI), who led a regionally and politically diverse coalition of nearly 100 congressional cosponsors, and aimed to put billions of dollars in new private investment to work in distressed communities throughout America.
 U.S. Government Office, “Title 26- Internal Revenue Code,” p.231.
 Economic Innovation Group. (2017). Opportunity Zones: A New Incentive for Investing in Low-Income Communities. Accessed Feb. 12, 2017.