Investing in Houston’s “Opportunity Zones” provides big tax savings

by | Sep 5, 2018 | Articles

More than 100 communities throughout Harris County, including downtown Houston and much of the area east of downtown, were recently designated “Opportunity Zones” by the U.S. Treasury Department as part of a new program to encourage private investment and development in certain distressed, low-income areas across the United States in exchange for significant federal tax benefits.

The new Opportunity Zone program was created by the federal Tax Cuts and Jobs Act (TCJA), signed into law on Dec. 22, 2017. Texas Governor Greg Abbott submitted the state’s Opportunity Zone nominations to the U.S. Treasury Department during March 2018, which included more than 600 census tract areas across 145 counties throughout Texas.

Attracting private investment into these distressed areas is expected to lead to their economic revitalization and to boost job creation throughout the state.

“This program will help highlight areas of Texas that are prime for business investment, and it will serve to bring more opportunities to hardworking families across the entire state,” said Governor Abbott in a March 22 press release. “As we continue to recover after [Hurricane] Harvey, these Opportunity Zone designations will also provide a much-needed boost for local communities impacted by the storm. With the potential for billions in new investment, I look forward to our state continuing to flourish, bringing further growth and opportunity to the people of Texas.”

Under the new law, investors can obtain three types of federal tax benefits as a result of investing in a “qualified opportunity fund” — an investment vehicle organized as a partnership or a corporation for the purpose of investing in, and holding at least 90 percent of its assets in, qualified Opportunity Zone property.

First, investors who realize gain from the sale of property to an unrelated party can defer paying tax on such gain until the earlier of (i) the investor’s disposition of its investment in the qualified opportunity fund, or (ii) Dec. 31, 2026. Investors must “roll-over” the realized gain into a qualified opportunity fund within 180 days of the sale, which must occur by Dec. 31, 2026.

Second, investors can eliminate up to 15 percent of gains reinvested in a qualified opportunity fund depending on the investor’s holding period in the fund.

Third, investors may increase the tax basis of their interest in a qualified opportunity fund to fair market value on the date of sale if they hold their interest in the fund for at least 10 years. As a result, investors would recognize no gain and, thus, would owe no tax on the sale of their interest in the qualified opportunity fund.

There are no individual or aggregate limitations on the amount of gain that can be deferred or eliminated under the Opportunity Zone program. Moreover, Opportunity Zones will retain their designation as such for 10 years.

Several types of businesses potentially qualify as Opportunity Zone investments, including: new real estate development or existing construction with improvements or renovations; manufacturing facilities; restaurants; car dealerships; oil and gas drilling; and service businesses with little tangible property outside the Opportunity Zone.

Real property renovations require significant investment, essentially doubling the basis in the property, and must be made within 30 months of the initial purchase. Qualified Opportunity Zone businesses cannot be recreational such as golf courses, country clubs, massage parlors, or liquor stores.

For a map of the Opportunity Zones in Harris County and the surrounding areas, click here (Adobe Flash required).

This article originally published in the Houston Business Journal.

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