Opportunity Zone Program Creates Investment Opportunities for NJ Businesses

Opportunity Zone Program Creates Investment Opportunities for NJ Businesses

Established under the U.S. Tax Cut and Jobs Act of 2017, the Opportunity Zone Program aims to encourage investors to direct capital into new projects in certain low-income rural and urban communities in exchange for federal capital gains tax advantages. In New Jersey, 75 municipalities have designed Opportunity Zones.

Photo courtesy of Alvin Engler (Unsplash.com)

Under the bi-partisan law authored by U.S. Senators Cory A. Booker (D-NJ) and Tim Scott (R-SC), Opportunity Zones must be located in low-income census tracts, which either have poverty rates of at least 20 percent or median family incomes no greater than 80 percent of the surrounding area’s pursuant to the 2011-2015 American Community Survey. To qualify as Opportunity Zones, communities must also have been nominated by their state governor and then certified by the U.S. Treasury.

Under the new program, 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. In addition, 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 Funds

To qualify as an Opportunity Fund, investment vehicles must meet several criteria. In addition to being certified by the U.S. Treasury Department, they must be organized as a corporation or partnership for the purpose of investing in Qualified Opportunity Zone Property, which may include opportunity zone business property, stock, or partnership interests.

Opportunity Funds must also hold at least 90 percent of their assets in Opportunity Zone Property. “Qualified opportunity zone property” is specifically defined as tangible property used in a trade or business of the qualified opportunity fund and located in a qualified opportunity zone if: (i) the original use of such property in the qualified opportunity zone commences with the qualified opportunity fund or, (ii) if the property is used, the qualified opportunity fund, during any 30 month period beginning after the date of the acquisition of such property, incurs costs with respect to such property that exceed the fund’s basis at the start of the 30 month period.

To become a qualified Opportunity Fund, an eligible taxpayer may self-certify and does not need prior approval by Treasury or the IRS.  To self-certify, a taxpayer only needs to complete a form, which should be released this summer, and attach it to the taxpayer’s federal income tax return for the taxable year.

New Jersey’s Opportunity Zones

Currently, all 50 states have received federal approval from the U.S. Department of the Treasury and the Internal Revenue Service to create Qualified Opportunity Zones.  In New Jersey, 75 municipalities have been awarded the designation. As tabulated by New Jersey Spotlight, below is a list of municipalities with at least one Opportunity Zone.

Benefits for NJ Investors

The new program offers several tax incentives for investors that participate in qualified Opportunity Funds. As detailed below, the incentives are largely dictated by the length of the investment:

• A temporary tax deferral for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is sold or December 31, 2026.
• A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis of the original investment is increased by 10 percent if the investment in the qualified opportunity zone fund is held by the taxpayer for at least 5 years, and by an additional 5 percent if held for at least 7 years, excluding up to 15 percent of the original gain from taxation.
• A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund, if the investment is held for at least 10 years. Notably, the exclusion applies to the gains accrued from an investment in an Opportunity Fund, not the original gains.

Taking the Next Step

While further guidance is still needed to answer many unanswered questions, the Opportunity Zone Program offers significant tax incentives to a wide range of investors. With a diverse team of affordable housing, real estate, tax and corporate attorneys, Scarinci Hollenbeck stands ready to help New Jersey investors navigate the new program and realize its benefits. To discuss potential opportunities for your business, we encourage you to contact us today.

If you have any questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Michael A. Jimenez, Esq., or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.