What Are Opportunity Zones and How Do They Work?
Save on Taxes While Making Communities Stronger with this Creative Investment Strategy
While every investment carries a unique combination of features, risks, and rewards, some offer an added layer of financial benefits and the ability to have a meaningful impact on the lives around us. Opportunity Zones (OZ) are the perfect example of these.
- Opportunity Zones Explained
- How to Invest in Opportunity Zones
- What is an Opportunity Zone Fund?
- What is a Qualified Opportunity Zone Business?
- Opportunity Zone Tax Benefits
- How Do I Find Qualified Opportunity Zones?
- Washington State Opportunity Zones
- What are Lakewood's Opportunity Zones?
- Opportunity Zone Investment Options in Lakewood
Opportunity Zones, or OZs, have attracted investors from all walks of life, with a combination of tax deferral and tax savings benefits, in exchange for redirecting their capital into strategic projects aimed at bringing growth and development to regions and cities that critically need investment. When all goes well, we get healthy, revitalized regions while investors realize a strong return combined with significant tax savings.
Opportunity Zones may represent the next step in your personal or organizational investment strategy. But it's important to gain a clear understanding of Opportunity Zones. In this article, we'll learn what Opportunity Zones are, how they work, where to find them, and how to invest. We'll also discuss Washington State's qualified OZs, and take an in-depth look at Opportunity Zones in Lakewood, WA. These already committed neighborhoods possess an incredible potential for development.
Opportunity Zones Explained
What is an Opportunity Zone? Opportunity Zones are geographic areas identified as low-income census tracts or economically disadvantaged areas that can offer powerful tax incentives to investors willing to deploy capital into them. These designated tracts are nominated by governors and their states or by U.S. Territories and certified by the U.S. Department of the Treasury.
Originally proposed by Senators Tim Scott, Cory Booker, and Representative Ron Kind, with considerable support from Sean Parker's Economic Innovation Group, Opportunity Zones were signed into law by President Trump in December 2017, as part of the Tax Cuts and Jobs Act (TCJA).
So far, 8,768 opportunity zones have been designated within the United States, with OZ's existing in every state and territory of the country. Additionally, OZs exist in many United States territories, including Guam, American Samoa, and Puerto Rico. More than 35 million people live within official OZs, with nearly 8 million below the poverty line. These figures represent both a staggering level of need within many of our communities and a significant opportunity to meet these needs with solutions created by Opportunity Zone investments.
How to Invest in Opportunity Zones
Many Opportunity Zone investment choices are available throughout the country and across a range of market sectors. Opportunity Zones real estate projects are one such investment. This often takes the form of housing, workforce housing, or commercial real estate, which includes retail, office, hospitality, industrial, and mixed-use projects. The preservation or redevelopment of historic properties is another avenue for some investors.
Besides real property projects, other Opportunity Zone investment choices include clean energy, healthcare, sustainable agriculture, manufacturing, and venture capital, along with taking an equity position in an existing business.
But no matter the entity you're creating or investing into, the simple answer to how to invest in an Opportunity Zone is to create a Qualified Opportunity Fund (QOF).
What is an Opportunity Zone Fund?
Investing in an Opportunity Zone Fund and benefiting from the preferential tax incentives available is done by placing eligible capital gains into a Qualified Opportunity Fund (QOF) by December 31, 2026. The QOF is the funding vehicle for your Opportunity Zone business. This fund can be formed as an LLC, C-Corp, and S-Corp.
To get Opportunity Zone tax benefits, you must roll the capital gains you wish to invest into your Qualified Opportunity Fund within 180 days from the time you sold your previously held asset. You must also file IRS form 8949 when filing taxes. Eligible capital gains can be from the sale of private business, stocks, bonds, or real estate.
You can also invest capital gains realized from the sale of non-qualified investments into a qualified fund, but this money won't be eligible for the same tax incentives. Opportunity funds are also subject to six-month and year-end reviews, ensuring compliance with all requirements and regulations.
What is a Qualified Opportunity Zone Business?
A fund can invest in any asset, as long as it is deemed qualified. This may be equipment or real property. If a property is purchased, the opportunity fund needs to make “substantial improvements” to the property within 30 months. The fund may also invest directly in a business. Here, a Qualified Opportunity Zone business must meet at least one of the two requirements below.
1) The management, operations, and tangible property needed to generate 50% or more of the gross income of the business are located in an Opportunity Zone; or
2) 50% or more of the services performed for the business by employees and independent contractors (based upon either compensation paid or hours worked) are performed in an Opportunity Zone.
Opportunity Zone Tax Benefits
Important deadlines for some Opportunity Zones tax benefits have already lapsed. This means that investors just starting their participation in OZ investments are not eligible for all benefits. There are, however, continuing discussions about extending the tax deferral deadline, allowing more people to take advantage of these benefits. Essentially, three options exist for cashing in on OZ tax advantages.
- Tax Deferral through 2026: The first benefit is tax deferral. Investors can defer capital gains taxes when reinvesting them into a qualified fund within 180 days of receiving the financial gain from the previous asset, as mentioned above. The capital gains invested will not be taxable until December 31, 2026.
- Step-Up Model: The second benefit involves a step-up model for capital gains. Individuals who invest qualified capital gains into a Qualified Opportunity Fund by December 31, 2021, and hold the investment for over five years can eliminate 10% of their tax burden from their original deferred gain. Simply put, if these stipulations are met, a $100,000 investment would only be taxed as if it were a $90,000 investment. Those who invested their money by December 31, 2019, and hold it for 7 years or more, will receive a 15% benefit. This means that while their invested sum remains at $100,000, only $85,000 is subject to taxes. Even though this benefit is no longer available, one of the most exciting benefits remains.
- Capital Gains Exclusion: Perhaps the most beneficial of all incentives takes place when the qualified fund sustains the investment for 10 years or longer. If you hold your investment for at least 10 years, you will pay no taxes on any new capital gains produced through your investment in the Qualified Opportunity Fund. In other words, if you sell your investment after 10 years, however much that property has grown in value will not be subject to capital gains tax.
Starting, growing, or expanding a business can be tough. Becky Newton, Lakewood Chamber's 2020 Ambassador of the Year, is your guide to better business in Lakewood.
Economic Dev. Manager
City of Lakewood
How Do I Find Qualified Opportunity Zones?
Taking advantage of qualified Opportunity Zones requires consideration, research, good planning, and, of course, knowing where to find them, both locally and nationally. It may seem like a chore, but locating OZs is as simple as accessing a qualified Opportunity Zones map, like the one found here on the EIG website. You can also access the IRS Notices 2018-48 (PDF), which lists opportunity zones alphabetically by state.
Washington State Opportunity Zones
With our newfound understanding of Opportunity Zones, the question for us locally is, what are some good examples of qualified Opportunity Zones in Washington State that I can invest in? And how do I learn more about Washington’s Opportunity Zones?
With 139 OZs in Washington State, Opportunity Zone investment options exist in abundance across several counties. King, Pierce, Thurston, Snohomish, Skagit, Pacific, and Okanogan Counties, to name just a few, are home to areas in need of development and serve as both current and potential focus points for Qualified Opportunity Fund dollars.
You can find a complete listing of current Washington OZs, at the Washington State Department of Commerce. You can also access a filter-specific database or Opportunity Zone explorer, at enterprisecommunity.org, where you can search for zones by county, zip code, and a handful of other designations.
What are Lakewood's Opportunity Zones?
Lakewood, in particular, offers a handful of Opportunity Zones with the potential to facilitate a variety of investments within several asset classes. These include:
- The Woodbrook and Tillicum neighborhoods (tract #53053072000)
- The Springbrook neighborhood (tract #53053071806)
- And the Lakeview-Kendrick neighborhood (tract #53053071805).
Isolation has been one obstacle to growth and wealth creation in these neighborhoods. Established to provide lakeside leisure, recuperation, and affordable housing for veterans, this beautiful area grew tremendously in its diversity while remaining a bit of an island away from the rest of the City of Lakewood. With years of limited transportation options and few local job opportunities, residents were forced to travel further at greater expense in both time and money, to work jobs to support their families.
These important neighborhoods have seen a measure of growth, through local, grassroots efforts toward establishing greater citizen awareness in local politics, increased communication, youth-and-family support programs, and new businesses.
The Woodbrook Industrial Park, a 40-acre hub, has already been sold to investors. Lakewood also set apart some 100 acres of prime land, perfect for industrial and residential purposes, for further development, offering an excellent location to establish both new business and housing solutions. Fully developed, the area could provide as many as 3,500 new jobs for residents and two to three times that number in support positions connected to these primary jobs.
The key to long-term success and sustained community growth within these Lakewood opportunity zones lies in the capacity and willingness of developers and residents to form transparent, respectful, mutually beneficial partnerships that seek to revitalize these dynamic neighborhoods permanently with new businesses and employment opportunities that keep most jobs in the hands of those living here.
Over time, successful, creative development and continued engagement by residents have the potential to bring lasting growth, economically, socially, and individually. Revitalized communities provide greater safety, healthier lifestyle choices, more education opportunities, financial well-being, and more stable, life-giving relationships.
Opportunity Zone Investment Options in Lakewood
Opportunity Zone Fund investment choices in these neighborhoods include:
- Single and multi-family residential
- And manufacturing
One benefit of investing in established, engaged communities like these is the incredible human capital available to you. Simply, these communities are eager to work and improve their quality of life.
Proximity to JBLM also means there is a constant supply of well-trained people looking for their next opportunity after their service contracts end. Combine this with the area's access to road, rail, and shipping and we can clearly see a competitive advantage forming.
As a city, Lakewood's investment appeal lies in several factors. It is a younger, thriving urban center in south Puget Sound, dedicated to supportive family-and-community values and a business-friendly environment. Lakewood is also one of the most strategically located cities in all of Washington State. Resting between Tacoma, with its major western seaboard shipping hub, handling nearly $70 billion in waterborne trade in 2020 alone, and our state capitol in Olympia. With both I-5 and Highway 512 on Lakewood's doorstep, access to Seattle, Portland, and the rest of the West Coast’s major metros is straightforward.
As the home of Joint Base Lewis-McChord, Lakewood hosts the 5th largest military base in the world. The countless dedicated servicemen and servicewomen of JBLM add so much to our region, in both the way they serve and through increased spending, investment, and new business development.
Lakewood is already booming and still carries an unparalleled potential for greater development. To learn more about Opportunity Zones and Lakewood's investment possibilities, visit the websites below. There's no limit to what Lakewood can offer those willing to partner with one of the nation's most diverse, engaged, and connected cities.
What are Opportunity Zones?+
Opportunity Zones are geographic areas that have been identified through considerable research, as low-income census tracts or economically distressed zones. State governors request tracts to be nominated by city and county governments, local organizations, and other groups, then designate these as their state’s potential Opportunity Zones. Finally, the U.S. Department of the Treasury certifies them as Opportunity zones.
What is a Qualified Opportunity Zone?+
A qualified Opportunity Zone (QOZ) is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment, including the deferral or even elimination of capital gains taxes. To qualify, an area must be nominated by one of the following authorities: the District of Columbia or a U.S. territory (e.g. state). Then, the nominated region must be certified by the Secretary of U.S. Treasury.
How Do I Invest in an Opportunity Zone?+
The most common way to invest is through a Qualified Opportunity Fund. To invest in an Opportunity Zone fund and benefit from the preferential tax incentives, you must place eligible capital gains into a Qualified Opportunity Fund (QOF) by December 31, 2026.
Which businesses are qualified for Opportunity Zones?+
A Qualified Opportunity Zone business must meet at least one of the two requirements below. 1) The management, operations, and tangible property needed to generate 50% or more of the gross income of the business is located in an Opportunity Zone; or 2) 50% or more of the services performed for the business by employees and independent contractors (based upon either compensation paid or hours worked) are performed in an Opportunity Zone.
What is an Opportunity Zone in commercial real estate?+
Qualified commercial real estate investments in Opportunity Zones may involve new construction, rehabilitation, or partial equity stakes in business or residential real property development. These investments can be a great place to place capital gains for the purpose of deferring or eliminating capitol gains taxes. These real estate investments also improve the low-income communities where they're hosted, creating a win-win for investors and the general public.
How Many Opportunity Zones are there in the US?+
The United States contains over 8,700 Opportunity Zones.
How many Opportunity Zones are there in Washington State?+
There are currently 139 Washington Opportunity Zones.
What Zones Qualify as Opportunity Zones?+
Eligibility for qualification as an opportunity zone requires either of two things.
1) a median family income of less than 80% of the surrounding area or
2) an average poverty rate of 20% or more.
States may designate up to 25% of their low-income census tracts as Opportunity Zones. These important communities, and the people that call them home, represent a diverse mix of individuals, families, and businesses. The list of OZ investments is long. And those wishing to benefit from incentives attached to Opportunity Zone investments must meet particular guidelines and specific expiration dates, for some of these benefits.