Federal Opportunity Zone Program
The Federal Tax Cuts and Jobs Act of 2017 included a significant tax incentive to encourage private investment in certain targeted census tracts in the country. "Opportunity Zones" ("OZones") are qualified census tracts designated by the Governor of each state. Taxpayers with capital gains can invest those gains into equity funds that put the money to work in businesses in these designated areas of high poverty and low income. In exchange, the taxpayer receives deferred- or in some cases complete forgiveness- of the federal taxes due on any gains that investment produces. The regulations are still being finalized by the US Department of Treasury, but program guidance to date has been extremely flexible. Funds can be set up easily and investments can be self-certified by taxpayers.
In simple terms, if an individual or corporate taxpayer sells appreciated property (stock or business assets), they can defer an unlimited amount of the gain from that sale by reinvesting an amount equal to the gain in a qualified Opportunity Zone Fund within 180 days. This investment postpones federal tax on those gains until the OZone fund is sold 2026 (whichever is earlier). If the taxpayer holds the OZone fund shares for five years, there is a 10% basis step-up (which offsets some of the capital gains on the OZone investment). After 7 years, there is an additional 5% basis step-up (which means capital gains tax liability is 85% of the original amount.) When the taxpayer sells the investment or December 31, 2026, whichever comes first, the taxpayer must pay tax on the deferred gains, but if the taxpayer holds their interest in the OZone fund for ten years, they can exclude any additional gains generated from the OZone investment. (Taxpayers should consult their own advisors for specific information and guidance.)
Three hundred eligible OZones in Pennsylvania have been designated by the Governor. The designated areas include a number of census tracts with significant activity or investment opportunities for both Low Income Housing Tax Credit projects and New Market Tax Credit projects. An interactive map of these OZone tracts and additional information can be found on the PA DCED Qualified Opportunity Zones web page.