The full impact of the Tax Cuts and Jobs Act of 2017, also known as the federal tax bill from this past December, is beginning to make itself known in the community development sector. One new program that got very little attention in the national debate that raged throughout the early November and December was the creation of federal “Opportunity Zones.” These Opportunity Zones (OZs), which can be found on page 130 of the bill, provide tax incentives to private developers in low and moderate income communities. Each state will be allowed to designate up to 25% of the eligible tracts for OZ status, with the final selections being made by the state’s governor. Pennsylvania has roughly 1,200 eligible tracts, meaning that Governor Wolf will be permitted to select 299 for OZ designation.
The idea behind OZs is not new, and was unsuccessfully floated during the Obama Administration. Some of the individuals that have lined up behind and lobbied for the inclusion of OZs in the tax bill includes Sean Parker, creator of Napster and early Facebook investor, Rob Busby, president of the U.S. Black Chambers, and Jared Bernstein, Vice President Biden’s former chief economist. Even in such starkly partisan times, there has been interest from both the Right and Left in what is, by any measure, a fairly neoliberal solution to urban and rural blight and neglect.
Private investment in designated OZs will be theoretically spurred on by three different tax incentives through a “qualified Opportunity Fund” – essentially an investment portfolio organized as a corporation used solely for investing in OZ property. The three tax incentives included in the OZ program are:
- The temporary deferral of taxation on unrealized capital gains reinvested into an Opportunity Fund, i.e. capital gains reinvested into an Opportunity Fund won’t be taxed until the end of a 5, 7 or 10 year holding period.
- Capital gains invested in an Opportunity Fund for a holding period of 5, 7, or 10 years will receive up to a 15% basis increase, i.e. if you invest $1,000 of capital gains, in ten years you will only be taxed on $850.
- The permanent exclusion of taxation on capital gains from the sale or exchange of in investment in an Opportunity Fund after ten years. However, the gains must have accrued after the Opportunity Fund investment.
There are many questions to be answered about this program, including how fairly OZ status will be doled out to LMI census tracts and whether giving private developers additional tax breaks will necessarily result in the neediest area getting investment and attention. PCRG is actively analyzing the legislation and assembling data and maps of eligible tracts in Western Pennsylvania to present to Governor Wolf. If you or your organization would like any further information about this program and/your eligibility, please feel free to reach out to us.
If you’d like to see which tracts in your community are eligible, see this online mapping tool.
Research Analyst at PCRG
Despite repeated attempts, Alix has always found a reason to stay in her hometown of Pittsburgh. She received both her undergraduate and graduate degrees from the University of Pittsburgh, with a one-year stint in Freiburg, Germany studying the European Union. Prior to joining PCRG, Alix was a community development consultant and adjunct professor. You can find her running around the East End, reading on her back patio, yelling about politics, and planning what to cook next.
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