What You Need To Know About The Opportunity Zone Program

December 11, 2019

The Opportunity Zone Program is a highly anticipated federal program with an ambitious goal to revitalize specific communities by offering tax incentives to commercial real estate investors, developers, and building owners.

Why The Opportunity Zone Program Should Work

Introduced as part of the president’s Tax Cut and Jobs Act of 2017, the Opportunity Zone program (OZP) aims at becoming “the first new economic tax incentive program to surface in nearly two decades following last year’s federal tax cut legislation,” according to Bisnow.

The goal of the bold new federal program is “to provide an incentive, in the form of a potentially sizable federal tax break, for investors to reinvest capital gains into economically distressed areas.”

It’s the latest effort from the United States government to revitalize specific areas of the country by reducing the capital gains impact when certain criteria are met. These incentives promoted the interest of commercial real estate investors, developers, and industry leaders to spur development in designated areas.

The Opportunity Zone Program In Frederick County

As of May 2018, the U.S. Department of the Treasury and the IRS designated opportunity zones in 18 states, including Maryland. Other states have pending nominated zones, accounting for a total of more than 8,700 communities nationwide.

“The City of Frederick Opportunity Zone encompasses the southern portion of Frederick’s vibrant downtown and is adjacent to the city’s award-winning [Carroll Creek],” according to Business in Frederick.

“Sitting at the cross-section of two major interstates – I-270 & I-70 – and hosting…the Frederick Municipal Airport and MARC train station, the area is well-connected and easily accessible.”

Another Opportunity Zone is the 355/85 Corridor that’s “located along the I-270 Technology Corridor, just south of the City of Frederick and is a hub of employment and development opportunities.” As the name suggests, technology companies are eyeing these Zones as hotspots for commercial real estate.

OZP Details

The two-part incentive includes a potential “deferral, until the end of 2026, of taxation equal to the capital gain realized on the sale of assets, provided the gain is reinvested within six months in a Qualified Opportunity Fund, in addition to other requirements.

The incentive also includes “the potential exemption of federal income tax upon the gain (if any) from the disposition of the OZP investment, provided it’s held for more than ten years. The investments must be in ‘distressed’ census tracts, namely those already identified as such under the New Markets Tax Credit program.”

To qualify for investment from a Qualified Opportunity Fund, commercial investors, business owners, and developers must, among other requirements,  have “businesses within a distressed census tract must hold at least 90 percent of their tangible real and personal property within a designated zone. Each entity will be tested twice annually to ensure it is at the 90 percent threshold.”

A few commercial businesses don’t apply for qualification, regardless of location. These businesses include golf courses and country clubs, suntan and massage parlors, hot tub facilities, racetracks and other gambling facilities, and liquor stores.

To see what commercial real estate industry professionals and advisors recommend for OZP guidelines, visit Bisnow’s Things To Know About The New Opportunity Zone Guidelines.