Opportunity Zones mark the latest way of helping investors save on taxes, while also aiding to advance the economic fabric of an underdeveloped community. These incentives were developed by the recently-passed Republican Tax Cuts and Jobs Act of 2017, which allows private investors to save on taxes by injecting cash into certain opportunity funds.
The bill is slated to help out communities all around the Washington, D.C. area, which include underprivileged regions in Virginia and Maryland. Here’s what you should know about Opportunity Zones.
How Opportunity Zones Are Chosen
Every area of the country that is part of the low-to-moderate-income (LMI) census tracts was eligible to be designated as an Opportunity Zone. A geographic region has the LMI designation if the median family income is under 80% of the median income of the surrounding area. Plus, if the area has a poverty rate of over 20%, there’s a good chance that it will become an Opportunity Zone.
A number of census tracts located adjacent to LMI tracts were also considered for designation, regardless of income status. Ultimately, deciding whether or not an area is an Opportunity Zone is a burden that would fall on the governor of each state, albeit with some limitations. Governors had the freedom to choose up to 25% of eligible LMI or high-poverty areas as Opportunity Zones.
Up to 5% of designated tracts could fall in the middle- or upper-income if they were adjacent to LMI tracts. The tracts were reviewed by the National Community Reinvestment Coalition (NCRC), which helped to finalize the list of opportunity zones around the nation.
What an Opportunity Zone Designation Means for the Area
Garnering an Opportunity Zone designation can be big for a certain census tract as unrealized capital gains, which are used to fund these investments, is valued at roughly $6.1 trillion. Such an investment can help to completely reshape communities as long as local groups, investors and city officials join forces to determine the best initiatives to invest in.
Some positives that could arise from these investments include the expansion of start-ups that may create jobs and stimulate local economies. Job training facilities in the area could also help citizens with limited education develop an actionable skill that they can use to make a living and improve their economic situation.
Opportunity Zone could reportedly bring in up to $2.2 trillion in investments, although this means nothing unless the money is invested wisely. As things stand, the program still has many flaws that could lead to a slew of issues such as displacement, so ensuring the money is going to the right channels is as important as the money itself.
How Taxpayers Will Benefit if They Invest in Opportunity Zones
Taxpayers have plenty of reason to invest in Opportunity Zones, which is an opportunity that is offered to those who reinvest gain from a sale of property into a “Qualified Opportunity Fund.” One such benefit is that reinvesting this gain in a Fund results in the gain being deferred until the earlier of the date when the taxpayer sells their interest in the Fund or December 31, 2026.
The investment also states that if a taxpayer invests in the Fund for at least five years, 10% of the original gain is excluded. If they do so for at least seven years, an additional 5% (amounting to a total of 15%) of the original gain is excluded. Plus, if a taxpayer invests in a Fund for 10 years or more, all appreciation in that investment will be tax-free once they exit the Fund.
How the DC Area Is Set to Benefit from Opportunity Zones
A total of 149 areas in Maryland have been identified as Opportunity Zones, consisting largely of east and west Baltimore, as well as Park Heights and large parts of south Baltimore such as Port Covington. Fort Meade, Aberdeen Proving Ground and the Indian Head naval facility in southern Maryland are also set to benefit from the designation.
Some of the initiatives that could help these areas include a slew of new mixed-use offices that Under Armour CEO Kevin Plank wants to bring to Port Covington. Plus, the state has identified an area in Montgomery County as the potential spot for Amazon’s second headquarters as state officials are seeking to expand the construction of distribution centers in the area. The Shaw neighborhood in DC is another candidate for the Amazon headquarters.
Michael White, chief of staff at the Maryland Department of Housing and Community Development, is hoping to reel in investors by choosing areas that already have other programs. Local officials, developers, and politicians discussed how bringing more offices and jobs in enterprise zones could offer businesses tax benefits, which is a win-win for everyone.
In Virginia, the benefit could also be huge in areas such as Charlottesville and Albemarle County where new housing and jobs could help low-income workers spend less time and money traveling. Areas in Albemarle have expressed their enthusiasm over how the northern tract could improve in the coming years as there are plenty of transportation improvements and amenities that have been released in the last few years, with many more to come.
All in all, the DC area has a lot to win from these investments, but not everyone is in favor of Opportunity Zones, which could cause a negative impact in some regions.
The Downside of an Opportunity Zone Designation
There is some concern regarding how investing in housing and commercial real estate locations in an LMI area could adversely affect its current residents. Some zones do not actually invest in their current residents as they instead focus on improving the neighborhood, leading to potential gentrification and the displacement of existing residents.
The DC area needs to be more careful about how it invests this money as the tax subsidy could result in increased property values, higher rents, and improved business profitability. Higher-income professionals could replace the local residents as a result of higher returns to investors causing larger tax subsidies, which leads to a rapid gentrification process.
The Urban Institute Analysis discovered in a study that a full third of the tracts nominated as part of DC’s Opportunity Zones are at high risk of increased socioeconomic change, including housing unaffordability and displacement due to these incentives. Potential neighborhoods affected include Brightwood, Pleasant Plains, Deanwood and Carver Langston.
Some cities are requesting to be excluded from the program due to displacement fears. Areas that are designated as Opportunity Zones and experience increased investment should be committed to developing housing below 60 and 30 percent of the area median income to keep rent low.
Existing businesses should be aided in order to help existing residents obtain gainful employment. The fact that Opportunity Zones are profit-driven, there is no incentive to actually help existing communities with programs such as Community Land Trusts, designed to help keep current housing affordable in the long-term by lowering speculative housing costs.
Ultimately, there should be enforceable regulations in place for Opportunity Zones that help to determine how the money benefits these communities, as well as proactive programmatic work that aids current residents.
The District of Columbia has nominated 25 Opportunity Zones as vehicles to leverage and encourage targeted investment in the city.
Opportunity Zones (OZ) are low-income census tracts that allow individuals and businesses to pool money for development while deferring taxes on gains from sales of assets within those tracts. Out of 97 qualifying low-income census tracts, the Office of the Deputy Mayor for Planning and Economic Development was able to nominate 25 to the Treasury Department and has selected the following:
- Census tract 2101, the area of Brightwood Park between Georgia and Missouri Avenues to the west and north, with 5th and Gallatin Streets NW to the east and south.
- Census tract 3400, which is roughly between Georgia Avenue and First Street, from Irving Street to Florida Avenue NW. The zone includes both Howard University and the address of the McMillan Sand Filtration Site, although it does not encompass the land McMillan sits on.
- Census tract 6400, which essentially encompasses the Buzzard Point neighborhood from South Capitol Street to Delaware and 5th Avenues SW beneath M Street. This area is home to the soon-to-open Audi Field soccer stadium.
- Census tract 6804, which runs under Benning Road to the west of Oklahoma Avenue, 22nd Streets NE, and 19th Street SE. The tract is bound by the Anacostia River (but includes RFK Stadium and parts of Kingman and Heritage Islands).
- Census tract 7304, which encompasses the portion of Congress Heights southeast of Alabama Avenue and Wheeler Road SE and just west of Stanton Road SE. This area borders southern Prince George’s County and contains the vast majority of Oxon Run Park and Parkway, as well as United Medical Center.
- Census tract 7401, which includes the Poplar Point and Barry Farm neighborhoods from the Anacostia River to South Capitol Street SE, east of the St. Elizabeth’s campus and bound by Suitland Parkway. While Barry Farm is being razed and redeveloped, the tract is also skirting the future landing of the 11th Street Bridge Park.
- Census tract 7407, containing the Fort Stanton neighborhood north of Suitland Parkway, west of Stanton Road, south of the intersection of Martin Luther King, Jr. Avenue and Morris Road SE.
- Census tract 7503, which is the historic Anacostia district bound by the Anacostia Freeway, Good Hope Road, and Morris, 16th and Bangor Streets SE. The neighborhood includes the Frederick Douglass Home and a raft of redevelopment that will include the first Busboys and Poets east of the River.
- Census tract 7601, which includes the portion of Fairlawn between the 11th Street Bridge Park/Good Hope Road and Minnesota and Pennsylvania Avenues SE, north of S Street.
- Census tract 7603, southeast of the Alabama Avenue and Naylor Road intersection and south of Pennsylvania Avenue SE. The tract includes Naylor Gardens, Hillcrest and Fairfax Village.
- Census tract 7604, northeast of the Alabama Avenue and Naylor Road intersection, south of Pennsylvania Avenue, including the neighborhoods of Good Hope and Randle Highlands.
- Census tract 7709, the Ward 7 area north of Pennsylvania Avenue and just east of the River, cutting off just above the DC Therapeutic Recreation Center and including parts of the Twining and Dupont Park neighborhoods.
- Census tract 7803, the Central Northeast area that runs north of Benning Road, east of Kenilworth Avenue, west of 47th Street and south of Nannie Helen Burroughs Avenue NE.
- Census tract 7804, the Lincoln Heights/Deanwood area straddling Nannie Helen Burroughs Avenue between 44th and Division Avenues from Hayes Street to East Capitol Street NE, and including the future Deanwood Town Center and redeveloped Strand Theater.
- Census tract 7806, the Deanwood area south of Kenilworth and Eastern Avenues and north of Sheriff Road NE.
- Census tract 7808, which stretches from the Northeast Boundary north of East Capitol Street, south of Eads Street and east of Division Avenue NE, including part of Marvin Gaye Park and much of the Watts Branch tributary of the Anacostia.
- Census tract 8904, which includes the triangular neighborhood of Carver-Langston east of the Starburst intersection (and potential redevelopment site) and bound by Benning Road, Maryland Avenue and 26th Street NE.
- Census tract 9102, including the Brentwood neighborhood between New York and Rhode Island Avenues, 18th Street NE and the train tracks that separate it from neighboring Eckington.
- Census tract 9204, the area of Edgewood bound between New York Avenue and Franklin Street with 4th Street and the aforementioned train tracks.
- Census tract 9601, the Kenilworth and Eastland Gardens neighborhoods just east of the River and north of the Watts Branch, between Kenilworth and Eastern Avenues NE.
- Census tract 9602, the Mayfair neighborhood just east of the River and south of the Watts Branch, between Kenilworth Avenue and Benning Road NE.
- Census tract 9603, the Benning area east of 295, north of East Capitol Street and south of Benning Road in Northeast.
- Census tract 10300, which primarily is sited between Piney Branch Road and Alaska Avenue NW, between Butternut Street and Fern Place NW, including the old Walter Reed Campus (and site of a massive ongoing redevelopment). The tract also includes the area of Takoma between Georgia and Eastern Avenues and Fern Place NW.
- Census tract 10400, which includes the St. Elizabeth’s campus (and site of the under-construction Monumental Sports and Entertainment Complex and larger mixed-use development). The tract also includes the portion of Congress Heights from the intersection of South Capitol Street and Martin Luther King, Jr. Avenue SE northward, bound by Alabama Avenue and the Hebrew Congregational Cemetery.
- Census tract 10900 of Bellevue, at the southernmost tip of the city bordered by both Prince George’s County and Alexandria, west of South Capitol Street and south of Galveston Street SW.
The selected zones were intended to focus on areas east of the Anacostia River, retail-heavy corridors and creative, industrial and manufacturing zones, but most also share the distinction of having a strong development pipeline.
To Recap, the “Three Major Benefits Available To Opportunity Zone Investors”
Investing in an Opportunity Zone yields three types of attractive benefits: 1) capital gains tax deferment, 2) capital gains tax reduction, or “trimming,” and 3) capital gains tax elimination. The level of benefit investors can take advantage of depends upon several distinct factors.
Profits from the sale of an existing investment will accrue tax. But using those profits, or capital gains, to reinvest in a qualified Opportunity Zone gives investors a deferment on paying those capital gains taxes, either until that new interest is sold or until the year 2026, whichever comes first.
What’s even better is that investors could see those capital gains tax payments reduced, or trimmed, by 10% or even 15%.
1. How to Reduce Capital Gains Tax Payments By 15%
To get a 15% reduction in paying capital gains tax from the sale of old property, an investor must use profits from that sale to reinvest in an OZ within 180 days of that sale. Further, they must finalize that new, OZ transaction before the end of 2019 and hold onto that investment through 2026. This fulfills the new tax code’s seven-year requirement.
2. How to Reduce Capital Gains Tax Payments By 10%
To get a 10% reduction in paying capital gains tax on the sale of old property, an investor must use profits from that sale to reinvest in an OZ by 2021, and they must hold onto that investment for a full five years, or until 2026.
3. How to Get Capital Gains Tax Eliminated (for the new investment only)
In order to see a complete elimination of capital gains tax payments, investors can purchase a new investment in a qualified Opportunity Zone (using their previous capital gains) but they must hold that interest for ten years or longer. The capital gains tax is eliminated on the future sale of the investment made with an investor’s initial capital gains investments. In other words, one would still have to pay deferred and potentially trimmed capital gains tax on their old investment in 2026, but when that Opportunity Zone investment is sold, if it were held for ten years or longer, no capital gains tax would be due. #RezaieReport #RezaieRE #RezaieCo
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