Federal Opportunity Zones
In 2018, the U.S. Treasury made opportunity zone designations across the country to encourage long-term investments through a federal tax incentive. Governor Brown's nomination resulted in 86 qualified opportunity zones in Oregon.
What Are Opportunity Zones?
Opportunity Zones can deliver significant tax savings on medium- to long-term investments in economically disadvantaged communities. This new tax incentive pertains to both the capital gains invested initially through a qualified opportunity fund (QOF), as well as future capital gains earned on the original investment in zone-based businesses or projects.
Each zone consists of an entire census tract, as established for the decennial U.S. Census. Tracts vary in size but generally align with population density. Oregon has 834 census tracts, more than 300 of which were eligible by meeting the definition of a "low income community" in terms of median family incomes or poverty rates. Oregon could nominate up to 86 zones, as each state was allowed up to 25% of its low income communities for designation.
The designations are in effect until December 31, 2028, and offer a predictable basis for private investment decisions over several years. Current federal law provides no means to change or add zones. As such, Oregon's nomination process entailed thorough analysis of all relevant census tracts for their potential to be used and to address economic needs, as well as extensive outreach to the general public, federally recognized Indian Tribes, local governments, and other parties over a 3-month period. Aside from the opportunity zone nomination process, state government does not have an ongoing, official role under federal law. Nevertheless, Business Oregon is exploring ways to partner with others in furthering the use of zones for the benefit of Oregon communities.
See Oregon's Opportunity Zones
What are the Tax Advantages?
The private capital for projects or businesses in a qualified opportunity zone will arise primarily from the unrealized capital gains of U.S. taxpayers—that is, the increased value of assets (stocks, land, etc.) since they were originally purchased by the individual or corporation currently holding the asset. When an asset is sold and the gains realized, an income tax liability is normally generated.
With the opportunity zone incentive, the capital gains arising from sale to an unrelated person that are then transferred into a qualified opportunity fund within 180 days will have their tax liability delayed or deferred until December 31, 2026, at the latest. The taxpayer decides how much of his/her newly realized gains to invest, when to sell or exit that investment, or even whether to invest other moneys alongside (which would not receive these tax benefits).
In addition to deferring income taxes, by the time the investment of tax-deferred capital gains in the opportunity zone is sold or the end of 2026, whichever is earlier:
- The amount subject to taxes shrinks by 10%—in that the basis in the investment increases—if the investment has been held for at least five years by 2026.
- If held for at least seven years in total, the basis increases by an additional 5% pts (15% in total).
- The amount subject to taxes is effectively the fair market value of the investment, if it has declined in value.
If the value of the original investment of capital gains appreciates after having been held for at least 10 years in the QOF, then those new capital gains earned in the zone are themselves completely tax free. Otherwise, the net income or proceeds generated by a zone investment are taxable. This 10-year hold on the investment in the QOF must begin on or before December 31, 2026, and the investment or interest in the QOF must be disposed of or liquidated or the gains realized on or before December 31, 2047.
Investors seeking to maximize the after tax return on their tax deferred gains could put money into qualified opportunity zones anywhere in the country, or they might be able to choose qualified opportunity funds that have a regional or other type of emphasis. Despite sharing some common geography, these tax benefits work quite differently from New Market Tax Credits, or for that matter, from any other federal program or incentive. Regulations and other guidance issued by the Internal Revenue Service (IRS) have now addressed most of the critical details, although future issuances are still expected and proposed rules are still to be officially finalized.
What Are Opportunity Funds?
A qualified Opportunity Fund is the required vehicle to invest into Opportunity Zones. More information on opportunity funds.
The information here is for public education. Every effort has been made to correctly use the best, most up-to-date data, but the state cannot guarantee complete accuracy, and under no circumstances is this information warranted for investment, tax planning, or any other reason. The information contained here should not be used as the basis of any decision with financial or other consequences, and regardless, working with a qualified tax advisor is recommended.
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