Public Law Monitor
Opportunity Zones Offer Attractive Investment Opportunities
May 22, 2018
Neglected neighborhoods throughout Indiana will soon have a new tool to attract investors.
More than 150 census tracts in Indiana — including 5 in Evansville and 1 in Princeton — will be included in a new federal initiative that provides a tax incentive for investing capital gains in low-income areas.
Called “Opportunity Zones,” these areas must have a poverty rate of at least 20 percent or a median family income no higher than 80 percent of the state median (or of the metro-area median, if that’s higher).
The program, created under the Tax Cuts and Jobs Act of 2017, allowed governors to nominate up to 25 percent of all low-income census tracts in the state for the designation. Once approved by the U.S. Treasury Department, Indiana’s designations will apply for 10 years.
The program encourages investment in opportunity zones through investment in “qualified opportunity funds” or “QOFs”. QOFs can be created by a variety of entities such as banks, economic development groups, or community foundations. QOFs need a targeted area or interest, but they have plenty of flexibility. For example, a group could create a fund for Midwest opportunity zones, Evansville zones, or even funds for health care facilities in Indiana zones. Each fund must invest at least 90 percent of its assets in opportunity zones, but those investments can be spread throughout multiple zones.
Any gains earned from investments in QOFs are tax-free. Moreover, by investing in QOFs, you can defer the inclusion of capital gains in gross income. Additionally, up to 15 percent of capital gains on investments in QOFs can be excluded from gross income altogether if they stay invested in the opportunity fund at least 10 years. Investments of 5 years can exclude 10 percent.
For example, if you sell stock that results in a $1 million gain, investing that money in a QOF would avoid a $238,000 tax bill that would come from a long-term capital-gains tax rate of 23.8 percent. In 10 years, if the value of the opportunity-fund investment grew to $2 million, the investor would pay $202,300 in taxes on the original $1 million gain and nothing on the second million.
Gov. Holcomb nominated 156 census tracts in 58 counties covering a combined 1,000 square miles and the homes of more than 500,000 Indiana residents. The zones will likely attract a wide range of developments that could include housing, commercial uses, energy projects, or startups that need space to grow.
For more information, please contact the Jackson Kelly attorney with whom you work or Joshua Claybourn in the firm’s Public Finance Industry Group at (812) 422-9444 or jclaybourn@jacksonkelly.com.
Joshua A. Claybourn is counsel in the public finance and utilities industry groups focusing primarily on municipal finance, utility regulation, and commercial transactions. He practices out of the firm’s office in Evansville, Indiana.