Opportunity Zones 101: Understanding the Basics

Author: Pat Kelly

Established by the 2017 Tax Cuts and Jobs Act, the Opportunity Zones Program encourages investments in regions needing economic rejuvenation, thus diminishing disparities in economic development across various areas. This program offers developers, investors, and communities a unique opportunity to engage in mutually beneficial economic development projects. Investors receive significant tax incentives, including deferrals, reductions, or even the potential elimination of capital gains taxes on investments within these zones. Concurrently, communities benefit from the surge of investment, leading to enhanced infrastructure, increased job opportunities, and revitalized local economies. In Connecticut, this initiative has identified 72 urban and suburban areas as Opportunity Zones, marking a significant stride toward economic revival.

The Framework of the Program

The Opportunity Zones program incentivizes both public and private sector participation in the economic development of these designated areas. Through tax benefits, investors are motivated to reinvest their capital gains into Opportunity Funds. These funds finance various projects within the Opportunity Zones, ranging from real estate development to business expansion and infrastructure upgrades. Connecticut's state government, together with the municipalities of these zones, is eager to utilize the program's potential to stimulate growth, create jobs, and improve the quality of life in its Opportunity Zones.

Investor Eligibility

Opportunity Zones offer substantial tax benefits to investors who channel any realized capital gains into a qualified Opportunity Zone Fund within 180 days of the asset sale. These Opportunity Zone Funds may invest in qualifying businesses, real estate, or infrastructure located within a federally designated Opportunity Zone.

Investors may reduce their federal tax burden in three key ways:

• Tax Deferral: First, capital gains reinvested in an Opportunity Zone Fund will be temporarily deferred.
• Tax Reduction [no longer available for new investments]: Taxes on those capital gains may be reduced if the Opportunity Zone investment is held for at least five years — and further reduced if held for at least seven years.
• Tax Elimination: Capital gains on the Opportunity Zone investment itself can be eliminated if the investment is held for at least ten years.

If an equity investment in a qualified project needs to be liquidated before the ten-year investment period concludes, the Opportunity Zone Fund can reinvest in another qualified business or project. Anyone can establish their own Opportunity Zone Fund, as outlined in the IRS overview. Investors may also join through other Opportunity Zone Funds, with new ones continually being established, including several in Connecticut.

Types of Eligible Projects

Opportunity Zone Fund investors are eligible for tax benefits if the fund invests in qualifying projects within Opportunity Zones. Eligible projects may include:

• Real Estate Projects: These should be either new developments or existing buildings requiring substantial renovation, including multi-family and single-family housing, commercial, retail, industrial, and mixed-use developments.
• Businesses: Investments can include any growing business willing to take equity investors in control or non-control positions, operating predominantly within the Opportunity Zone and generating most of their revenue from sales within these zones.
• Energy-Related Projects: Energy efficiency and renewable energy projects are also eligible, potentially deriving their value from reliable long-term cash flow.

For a listing of Opportunity Zones in Connecticut, visit: https://ctozmap.com/

Future Outlook

As the Opportunity Zone program evolves, stakeholders, including policymakers, investors, and community members, will influence its impact. Monitoring legislative changes and community engagement is crucial for maximizing the program's potential. For more information on Opportunity Zones, please visit CTOpportunityZones.com or contact a Whittlesey Advisor. The Whittlesey real estate team stays on top of the latest developments in the Opportunity Zone program to help you maximize your investment potential.