In Birmingham, Alabama, Sally Mackin is executive director of the Woodlawn Foundation, a nonprofit involved in a variety of local revitalization efforts. She said the group “worked frantically” to make sure the Woodlawn neighborhood was included as one of Alabama’s Opportunity Zones.
“It could be great tool,” Mackin said. But she also cautioned that “we don’t want it to just be this, like, Wild West of people coming and haphazardly doing things just to make money.”
Readers of the RECONOMICS book preview will know that her concern is justified: without a strategic process to guide the investments, it’s possible they could be wasted at best, or actually do more harm than good at worst.
The Opportunity Zones program provides tax breaks for people and corporations that funnel capital gains, from investments such as stocks or hedge funds, into “Opportunity Funds.”
These funds are supposed to be used to make investments in economically distressed census tracts designated as zones. Governors around the U.S. chose the zones and the Treasury Department and the Internal Revenue Service finished certifying their selections in June.
There are now about 8,700 census tracts, in all 50 states, with nearly 35 million residents, eligible for the program.
An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation authority to the Internal Revenue Service.
Opportunity Zones are designed to spur economic development by providing tax benefits to investors. First, investors can defer tax on any prior gains until the earlier of the date on which an investment is sold or exchanged, or December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be eligible for an increase in basis equal to the fair market value of the investment on the date that the investment is sold or exchanged.
Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an Opportunity Zone and that utilizes the investor’s gains from a prior investment for funding the Opportunity Fund.
To become a Qualified Opportunity Fund, an eligible taxpayer self-certifies. Thus, no approval or action by the IRS is required. To self-certify, a taxpayer merely completes a form (which will be released in the summer of 2018) and attaches that form to the taxpayer’s federal income tax return for the taxable year.
Boosters of Opportunity Zones say there’s upwards of $6 trillion in unrealized capital gains available to fuel the program, predicting it could evolve into one of the nation’s biggest economic development initiatives. For now, however, it remains unclear how much investment it will spur.
There are also concerns, like those Mackin raised, about whether the zones will accelerate gentrification in certain areas, forcing out the very people and businesses that its creators say it could help. Or whether it will subsidize projects that would have happened without special tax incentives and leave other struggling neighborhoods behind.
Photo of Birmingham, Alabama via Adobe Stock.