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Circle of Competence Issue #41

Quote of the week: "The idea is to die young as late as possible" - Ashley Montagu, (George Bush in his late father's eulogy)


Opportunity Zones

This week we wanted to share some thoughts and links around Opportunity Zones, a feature of the tax cuts enacted in 2017. We have been studying these for a few weeks now and believe that these could be a huge boon to investors who 1) currently have a lot of capital gains taxes in certain investments or 2) wish to invest where capital will attract the highest return and suffer the lowest tax consequences and 3) will benefit communities that have been designated as opportunity zones.

For starters, what exactly is an Opportunity Zone? It is a census tract that has been designated by the state in which it is located as an area that will be eligible for investment from a qualified opportunity fund. These areas typically have at least a 20% poverty rate or a median income that is not more than the higher of 80% of the state or metropolitan area median income. Investors must register their fund as a 'qualified opportunity fund' and to remain eligible as such must invest at least 90% of its assets into qualified opportunity zones. In addition to the qualified opportunity fund requirements, there are specific and stringent requirements for how investors are to invest in real estate and in operating businesses inside of opportunity zones which can be found in the Bloomberg tax journal link and OFN fact sheet below.

So what's all the noise over these Opportunity Zones? It's all to do with tax implications. For starters, if you are currently sitting on large capital gains from other investments, you could roll those capital gains into a qualified opportunity fund and avoid paying those capital gains taxes until 2026 at the latest or until you sold your new investment. In addition, the longer you hold the new investment, the greater the discount you get off of your current capital gains. And finally (!), if you hold your investment for greater than 10+ years, you pay ZERO capital gains taxes on the gains from the new investment. Talk about a tax lollapalooza! We do wonder however about the second order effects of the policy, namely, the following questions we are continuing to ponder:

- How much gentrification will occur in these opportunity zones due to increases in capital flows into the area?

- Will these opportunity funds provide actual lasting value to the communities in which they are developing?

- Net net, will this policy create new jobs or just move them to opportunity zones?