Economic Advantages for Operators and Tenants

The Tax Cuts and Jobs Act of 2017 allowed governors to nominate certain census tracts as Opportunity Zones, subject to approval from the U.S. Department of the Treasury. Up to 25% of a state’s low-income census tracts were eligible for designation.

In April 2019, Indiana Governor Eric Holcomb nominated 156 Opportunity Zones based on a combination of factors including existing economic development programs and local coordination, economic and community data, likelihood of attracting short- and long-term investment, and growing industry sectors within the community. 

The city of Hammond in Lake County Indiana, home of the Digital Crossroad data center campus, has been designed a Qualified Opportunity Zone.

What is an Opportunity Zone?

Opportunity Zones seek to encourage economic growth and investment in designated distressed communities by providing Federal income tax benefits to taxpayers who invest in businesses located within these zones.

What are the Economic Advantages of Opportunity Zones?

Section 140OZ-2 of the IRS tax code provides two main tax incentives to encourage investment in qualified opportunity zones. First, it allows for the deferral of inclusion in gross income for certain “gains” to the extent that corresponding amounts are reinvested in a qualified opportunity fund (QOF). Second, it excludes from gross income the post-acquisition gains on investments in QOFs that are held for at least 10 years.

What “Gains” Are Eligible?

The proposed regulations provide that a gain is eligible for deferral if it is treated as a capital gain for Federal income tax purposes. Eligible gains, therefore, generally include capital gain from an actual, or deemed, sale or exchange, or any other gain that is required to be included in a taxpayer’s computation of capital gain.

When Do I Need to Act?

To be able to elect to defer gain, a taxpayer must invest in a QOF during the 180-day period beginning on the date of the sale or exchange giving rise to the gain. Capital gains must be recognized and invested no later than December 31, 2026.  The Opportunity Zone program is expected to terminate on December 31, 2047.

Who Can Participate in Opportunity Zones?

Individuals, C corporations, Real Estate Investment Trusts (REITs), partnerships and certain other pass-through entities including common trust funds described in section 584, as well as, qualified settlement funds, disputed ownership funds, and other entities taxable under §1.468B of the Income Tax Regulations are eligible for tax deferral.

What Qualifies as an Opportunity Zone Investment?

An investment in the QOF must be an equity interest in the QOF, including preferred stock or a partnership interest with special allocations and cannot be a debt instrument. To remain certified as a Qualified Opportunity Fund, the Fund must hold at least 90% of its assets in Qualified Opportunity Zone property. Such property includes certain stock or partnership interests of the underlying business, and/or business property (personal and/or real property) of a Qualified Opportunity Zone business.

To learn more about how your company can benefit from an investment into a Qualified Opportunity Fund, please contact us.

Disclaimer: The information presented here has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the information presented here without obtaining specific professional advice. No representation or warranty is given as to the accuracy or completeness of the information. You should also be aware that additional Treasury Regulations are due to be released to further clarify the Opportunity Zone Program provisions of the Internal Revenue Code.

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