Recently there were several articles stating that Antioch’s Somersville Towne Center area had been designated as an “Opportunity Zone”. What is an Opportunity Zone?
In December 2017, President Donald Trump signed the Tax Cuts and Jobs Act of 2017. The $1.5 trillion tax bill included within it a provision designed to encourage investment in low-income communities. Titled the “Investing in Opportunity Act,” it permits governors to designate low-income census tracts in their states as “Opportunity Zones.” To qualify as “low-income,” the census tract must have as a poverty rate of at least 20 percent and median family income no greater than 80 percent of the median for the overall region.
Governors in each state and U.S. territory (and the Mayor of Washington, D.C.) were tasked with identifying a certain number of census tracts which will be eligible to receive private investment through the Opportunity Zones Program over the next decade by March 21. Governors don’t have the final say in the process: the Treasury Department is expected to certify the zones later this year. Only one in four low-income areas in any state can be designated as an Opportunity Zone, so states must reject more neighborhoods than they select. Investors, like banks or hedge funds, then create Opportunity Funds to seed either new businesses in those areas, expansions of existing ones or real estate development.
There are 3,516 census tracts in 54 California counties that would qualify under one or both of the mandatory criteria, allowing the Governor to designate up to 879 tracts. As census tracts are designed to capture geographic areas of around 4,000 people, more than 3 million Californians would potentially be located in one of these areas.
The City of Oakley submitted two census tracts for consideration but neither met the criteria. However, a small sliver of far western Oakley that is in included in a census tract that contains the majority of north eastern Antioch was submitted to the Governor.
On March 22, 2018 the city was informed “that the Governor’s nomination of eligible census tracts for designation as Opportunity Zones in California was submitted to the U.S. Department of the Treasury yesterday evening, March 21”.
Opportunity Zones offer favorable capital gains treatment for taxpayers who invest in designated high poverty neighborhoods. Invest in real estate or businesses located in a qualified zone, hold it for ten years, and not only can you sell your investments free of capital gains tax, but you also you get a tax break on untaxed capital gains rolled into an Opportunity Zone investment.
More than $2 trillion in unrealized capital gains are sitting on individual and corporate balance sheets across America, according to the Economic Innovation Group. Normally, the proceeds from the sale of those assets would be taxed as a capital gain, at a maximum federal rate of 20 percent plus a 3.8 percent surtax. The new law offers investors an alternative: to roll those unrealized gains into an Opportunity Fund, and defer federal taxes on the profit, at least temporarily.
That deferral grows into capital gains tax relief the longer the investment is held. An investor who retains an investment for seven years will pay only 85 percent of the capital gains taxes that would have been due on the original investment. If the investment is held beyond 10 years, the investor permanently avoids capital gains taxes on any proceeds from the Opportunity Fund investment.
Unlike low-income housing tax credits or new market tax credits, the opportunity zone program doesn’t limit what kind of investment stakeholders can make in order to reap tax benefits.