What is Opportunity Zone?
The Opportunity Zone Program was introduced as part of the 2017 tax reform package and was designed to encourage investment into low-income urban and rural communities through incentive programs for private investors. The program was developed by the Economic Innovations Group (EIG) in 2017, and was established to bridge the gap between communities that flourish, and those communities where lack of economic growth has left them behind. Enterprise Community has defined a few key terms involved in the discussion of Opportunity Zones:
Opportunity Zone: A census tract which has been designated as eligible to receive private investments through Opportunity Funds.
Opportunity Fund: Private investment vehicle, certified by the Treasury, to aggregate and deploy capital in Opportunity Zones for eligible uses defined as Opportunity Zone Property.
Opportunity Zone Property: Asset types eligible for investment under the Opportunity Zones Program.
How are Opportunity Zones Determined?
Opportunity Zones are defined through use of a census tract, where places with an individual poverty rate of at least 20 percent and median family income no greater than 80 percent of the area median qualify. There are some exceptions to the low income census tract areas, however they are the most commonly deemed Opportunity Zones. Governors are charged with the responsibility of reporting Opportunity Zones – an incentive put in place to encourage local government involvement and higher community standards.
What are the incentives?
Investors are awarded tax incentives for reinvesting unrealized capital gains into Opportunity Funds. An unrealized capital gain is a profit created from an investment that exists in the investing world and has yet to be cashed in. Investors avoid paying tax when they reinvest into Opportunity Zone Funds, and the longer the investor holds onto their Opportunity Zone investment, the more tax breaks they receive in the payout. Read more about how the incentives work here.
Why are Opportunity Zone Programs Important?
Opportunity Zone Programs promote funds being rechanneled back into low-income areas across the nation through incentive programs. This encourages economic growth within communities, and as economic growth happens, a community has the ability to sustain commerce, businesses, etc. As this process happens, better schools, hospitals, and overall community health can be observed across the country.