Opportunity Zones were created as part of the Tax Cuts and Jobs Act from 2017. Due to the nature of the legislation, business owners and investors had to patiently wait for clarification and the designation of these areas. With the potential to impact over $6 Trillion in capital, and lasting over ten years, Opportunity Zones are certainly worth understanding on a deeper level. In this article we dive into Opportunity Zones in their entirety with a specific focus on the state of Colorado.
What Are Opportunity Zones?
Opportunity Zones were created to incentivize private capital placement in communities that need it most. Investors are eligible to receive substantial tax benefits in the form of temporary deferral of capital gains, partial reduction of capital gains, and potential forgiveness of additional capital gains derived from opportunity zone investments.
For an area to be designated as an Opportunity Zone it must be deemed as a low income census tract with a poverty rate of at least 20 percent and median family income no greater than 80 percent of the area median. In every state, up to 25 percent of the total number of census tracts that qualify as an Opportunity Zone can be designated as such. Additionally, a census tract that is not a low income community may be designated as a qualified Opportunity Zone if the tract borders a low income community and the median family income does not exceed 125 percent of the low income community median income of the bordered tract. In these exceptions, only 5 percent of overall census tracts that that qualify may be designated as Opportunity Zones.
Although this is a Federal program, Governors actually select which low income census tracts qualify as an Opportunity Zone. This piece of legislation was tailored to concentrate capital in targeted areas, and allowing Governors to determine those areas helps ensure local level needs are met. Governors had 90 days from the date of enactment (December 22nd 2017) to select and submit their census tracts to the Treasury for final approval. Once approved, the overall designation period for an Opportunity Zone last 10 years.
The state of Colorado has 126 census tracts federally designated as Opportunity Zones. In addition, Colorado state Governor, Jared Polis announced on February 11th, 2019 the formation of a dedicated office within the Office of Economic Development and International Trade specifically tasked to cultivate and support investment into Colorado’s 126 Opportunity Zones.
Created to incentive private capital placement in communities that need it most.
Offer tax benefits in the form of deferral, partial reduction, and forgiveness of capital gains.
Based on low income census tracts.
Governors designate, Treasury approves.
Colorado has 126 census tracts designated as Opportunity Zones (map below).
The History of Opportunity Zones
In 2015 the bipartisan public policy firm, the Economic Innovation Group introduced the concept of Opportunity Zones. The idea stemmed as a systematic approach to solving uneven economic recovery and lagging growth that many communities in America face. The Concept was originally introduced in 2016 to the 114th Congress.
On February 2nd, 2017, Senator Scott sponsored the bill re-introducing it as the S. 293 Investing In Opportunity Act to the 115th Congress.
Eventually the bill passed as part of the Tax Cut & Jobs Act, making it the first new tax incentive program enacted since the Clinton Administration.
The enactment date of December 22nd, 2017 gave Governors 90 days to submit to the Treasury, Opportunity Zone designation recommendations for their state. Once approved, the designated Opportunity Zones stay in effect for 10 years.
On October 19th, 2018 additional guidance clarifying the self certification process for investors was released under US Code section 1400Z-2. To self certify, investors must report their investment in a Qualified Opportunity Fund to the IRS by attaching form 8949 to their taxes.
Overall, the process of participating in Opportunity Funds was setup to be simple. There is no requirement or approval needed by the Internal Revenue Service only the utilization of Form 8949. The ease of Opportunity Funds was important in ensuring that the legislation gained participation. Opportunity Zones are a bipartisan initiative geared at driving private capital placement in communities that need it most.
Most economic experts believe implementation and utilization of Opportunity Zones will begin Q4 of 2018 or Q1 of 2019.
Concept introduced by the bipartisan Economic Innovation Group.
Quickly gained strong bipartisan support.
Included as part of the Tax Cut & Jobs Act.
Investors self certify with form 8949.
Should see implementation begin Q4 of 20018 or Q1 of 2019.
How Opportunity Zones Help Communities
According to the Economic Innovation Group, research suggest that 1 in 6 Americans live in economically distressed communities. This equates to 52 million people. In Colorado alone, 400,000 individuals live in zip codes deemed as economically distressed.
The idea of Opportunity Zones is to concentrate private capital into areas that are lagging economic recovery and overall growth. As private capital floods these areas, property conditions improve, jobs are created, and the community as a whole benefits. To ensure placed capital stays in the area and creates a lasting impact, longer holding periods generate greater overall tax benefits. Simply put, the longer capital is kept in the community, the greater the tax incentive.
Addressing the issue of 1 in 6 Americans living in economically distressed areas.
Patient capital is rewarded with greater tax benefits, incentivizing capital to remain in the community for long periods of time.
Tax Benefits of Opportunity Zones
The Opportunity Zone tax provisions are designed to reward patient capital. The tax benefits are tied to the longevity in which an investor is willing to hold their investment in the Opportunity Zone. There are three main tax benefits in the form of temporary deferral of capital gain, partial reduction of capital gain, and forgiveness of capital gain.
1) Temporary Deferral of Capital Gain
The first major benefit is the ability for investors to roll existing capital gains into an Opportunity Fund with no upfront tax bill. Temporary deferral offers investors the opportunity to reinvest capital gains in an Opportunity Zone fund without having to include the amount in their overall taxable income. The deferred gain is not recognized until the investor exits the Opportunity Zone investment or December 31st, 2026, whichever comes first. An example of this would be as follows… An investor has $100 in realized capital gains from selling a stock. Within 180 days of the sale, the investor decides to reinvest that $100 in an Opportunity Zone Fund. The investor is then entitled to defer the taxes owed on that $100 until they either exit the Opportunity Zone fund or December 31st, 2026.
2) Partial Reduction of Capital Gain
As mentioned before, the tax benefits of Opportunity Zones reward the longevity of the investment. If an investor places capital gains in an Opportunity Zone and keeps it there for a minimum of five years, the investor receives a step-up in their tax basis of 10%, reducing their overall rolled capital gains to 90% of the original amount. Should this investor keep their capital in the Opportunity Zone for another two years (seven total), the step-up in their tax basis increases another 5%, reducing the overall rolled capital gains to 85% of the original amount. An example of this would be as follows… An investor has $100 in realized capital gains from selling a stock. Within 180 days of the sale, the investor decides to reinvest that $100 in an Opportunity Zone Fund, thus incurring no upfront tax bill. The investor keeps their capital in the Opportunity Zone for five years, hitting the mark of the 10% step-up and reducing their overall taxable capital gains on the original amount from $100 to $90. The investor keeps their capital in the Opportunity Zone for another two years, and receives an additional 5% step-up, reducing their total taxable gains on the original amount from $100 to $85.
It’s important to note if the investor keeps their funds in the Opportunity Zone for a date beyond December 31st, 2026, they will run into phantom income gains in which the tax liability must be paid with capital outside of the Opportunity Zone.
3) Forgiveness of Capital Gain
Finally and perhaps the most impactful tax benefit of Opportunity Zones is the possibility of overall forgiveness of capital gains. For investors willing to keep their capital in the Opportunity Fund for ten years, no capital gain taxes are assessed on their Opportunity Zone investment. Any original capital gains rolled over to the Opportunity Fund would still need to be settled, but appreciation of the Opportunity Fund investment would carry no capital gains tax. An example of this would be as follows…An investor has $100 in realized capital gains from selling a stock. Within 180 days of the sale, the investor decides to reinvest that $100 in an Opportunity Zone Fund, thus incurring no upfront tax bill. The investor keeps their capital in the Opportunity Zone for seven years, reducing their total taxable gains on the original amount from $100 to $85. Three years and one day later (over ten years total), the investor exits the Opportunity Zone investment for $300, netting a capital gain of $200 on the investment. That $200 is free of capital gain taxes.
To truly understand the impact of this we created a graphic that outlines the hypothetical example detailed above with the alternative option being a standard portfolio investment. The assumptions assume no state income tax, long term capital gains at the Federal level of 23.8%, and equal 7% annual returns for both the standard portfolio investment and the Opportunity Zone.
The vehicle in which an investor makes an investment in Opportunity Zones is referred to as an Opportunity Fund. The process to certify as an Opportunity Fund requires no approval from the IRS or any other governing body, it is simply completed in a self-certify manner. Individuals, business entities, and trusts can all invest in Opportunity Funds. To self-certify, the investor simply attaches form 8949 to their tax returns indicating the use of an Opportunity Fund. There are associated penalties for not meeting certain thresholds, which we cover in a later section of this article.
Opportunity Funds have the option of investing into Opportunity Zones by way of partnership interest or stock of a qualified Opportunity Zone business or directly into an Opportunity Zone commercial property.
Qualified Opportunity Zone Businesses
Qualified Opportunity Zone Businesses offer investors the ability to place capital in businesses of the areas that occupy Opportunity Zones. The investment can be made in either a domestic partnership interest or stock of a business in an Opportunity Zone. The exceptions to this are “Sin” businesses, such as private or public golf courses, massage parlors, country clubs, hot tub or suntan facilities, gambling halls, or any store used for the sale of alcoholic beverages for consumption off premises. Additionally the business must remain as a Qualified Opportunity Zone Business for substantially all the qualified Opportunity Funds holding period. The investment must be made after December 31st, 2017 in an exchange for cash.
To classify as an Opportunity Zone Business substantially all of the tangible property must be leased or owned by the business in the Opportunity Zone property. The business must derive at least 50 percent income from active conduct. The stipulations are that a business may have 5 percent of assets plus reasonable working capital held in cash or liquid investments. In addition, Intangible assets are ok, but they must be actively used in the trade of the business.
Qualified Opportunity Zone Commercial Property
In addition to Qualified Opportunity Zone Businesses, investors can invest capital directly into Qualified Opportunity Zone Commercial property. This is a direct method of investment into commercial property used by a business or trade, that is located in an Opportunity Zone. To qualify, the acquired purchase must be made from an unrelated party after December 31st, 2017. 90 percent of the capital must be invested in tangible property leaving 10 percent available to be held in intangible property, cash or another form of liquid investments. The investment commences with the taxpayer use of the property or if the taxpayer substantially improves the property during any 30-month period post acquisition. Substantial improvements are defined as an amount equal to the adjusted basis of the property at the beginning period.
Certification, Compliance, Requirements, and Penalties
As mentioned before, investors self certify as an Opportunity Fund. This is done by attaching form 8949 to their tax forms. There is no approval process or action by the IRS (or any other governing body) making it an easy and simple way for capital to be invested. All Opportunity Funds must be organized as a corporation or partnership. LLC’s are ok to utilize if they are treated as a corporation or partnership. Additionally, a minimum of 90 percent of assets must be invested in Opportunity Zones.
Failure to meet the 90% threshold carries a monthly penalty. The penalty is calculated by the percentage of the shortfall multiplied by the underpayment rate, plus interest. If it can be shown that failure was due to reasonable cause, then the penalty can be avoided.
State Tax Implications
While Opportunity Zones are a Federal initiative, individual states must decide if and how they will treat tax benefits on the state level. States that generally piggyback on Federal Law may decide to decouple or continue piggybacking. The state of Hawaii, which generally piggybacks Federal Law has already decoupled from the Opportunity Zone tax benefits at a state level. States such as Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not have a state income tax and therefore have less decisions to make as it pertains to Opportunity Zones. Some states are finding ways to incorporate other benefits with Opportunity Zones. For example, California introduced a bill that exempts projects from the California Environmental Quality Act if said projects are in Opportunity Zones.
The state of Colorado has implemented Enterprise Zone tax credits which compliment Opportunity Zones quite well. In addition, Governor Jared Polis announced on February 11th, 2019 the formation of a dedicated office within the Office of Economic Development and International Trade specifically tasked to cultivate and support investment into Colorado’s 126 Opportunity Zones.
Undoubtedly investors will run into Opportunity Zone transactions with multiple state repercussions. For example if capital gain was realized from a sale in California and then rolled into an Opportunity Zone in Colorado, the investor must adhere to each individual states taxation laws. This will require understanding how these tax benefits are treated on a state level.
Colorado Business and Property Owners In Opportunity Zones
For Colorado business and property owners in a designated Opportunity Zone there are a few things you should know. Opportunity Zones were created with the initiative of fostering strong economic growth in your community. If your business is in a position to expand, now might be the time to acquire that facility near by, especially if it is in an Opportunity Zone. Additionally, your enterprise and property now carry an added incentive for outside investors and buyers, specifically as it compares to other options that are not located in Opportunity Zones. For buyers to acquire your business or property and meet the vesting requirements for tax benefits, they need to roll over their capital gain within a 180 day window. You should have your business and property in line, ready to complete a timely transaction should a buyer come along. Have your property and business appraised. Make sure all files are up to date. Aggressively clean any lingering liabilities that would delay a transaction. The 180 day window is crucial for buyers to realize the tax benefits that accompany Opportunity Zones and organization on your side could mean all the difference between a sale or no sale. Lastly, if you do sale your property, consider rolling that over into other Opportunity Zone investments. You too can benefit from investing in Opportunity Zones.
If you are an active investor, you should be consciously exploring the great possibilities Opportunity Zones have to offer. Investors willing to deploy patient capital will see the largest benefits in tax savings. For those searching buy-side opportunities, be sure to identify multiple investments to avoid lapse of the 180 day window should a single deal fall apart before the close. The ability to invest in businesses and commercial property opens up wide diversification for your entire portfolio. Everything from ski towns to metro areas have been included as designated Opportunity Zone areas. The broad nature of this initiative presents endless asset and geographical exposure options for investors looking to shape their entire portfolio.
Colorado Opportunity Zone Locations
Where are Colorado Opportunity Zone locations? Spanning 126 census tracts these designated areas are scattered all across the state. Below you will find a map of all Opportunity Zones listed in Colorado along with additional detailed snapshots of specific locations within the state.
Boulder, Colorado Opportunity Zones
Broomfield, Colorado Opportunity Zones
Canon City, Colorado Opportunity Zones
Colorado Springs Opportunity Zone Locations
Durango, Colorado Opportunity Zones
Estes Park, Colorado Opportunity Zones
Fort Collins, Colorado Opportunity Zones
Garden City, Colorado Opportunity Zones
Greeley, Colorado Opportunity Zones
Grand Junction, Colorado Opportunity Zones
Denver, Colorado Opportunity Zone Locations Around North Denver
Denver, Colorado Opportunity Zones Around West Denver
Denver, Colorado Opportunity Zones Near DIA (Denver International Airport)
Denver, Colorado Opportunity Zones near Park Hill
Denver, Colorado Opportunity Zones Around Mile High Stadium
Denver, Colorado Opportunity Zones Around East Colfax
Monte Vista, Colorado Opportunity Zones
Pueblo, Colorado Opportunity Zones
Navigating Opportunity Zones can be a challenge. Fortunately there are a lot of high quality resources available to help you through the process.
National Opportunity Zone Resources:
Colorado Opportunity Zone Resources:
Government Forms and Legislation:
Here to Help
Singleton Valuations specializes in business valuations and appraisals. We focus on helping owners and operators identify valuation gaps within their company and then prioritize initiatives to increase the overall value of their entity. If you have any questions about Opportunity Zones, or are interested in learning how we are helping other owners and investors in Opportunity Zones, say hello via our contact page .