New tax break rules for 'opportunity zone' investors

In this April 26, 2018, photo a sign stands on the banks of the Hackensack River near the site of the construction of the new Newark Turnpike bridge in a so-called “opportunity zone” in Jersey City, N.J. The Trump administration on Friday, Oct. 19, proposed rules for investors in a new program that it says could have a big impact on economically depressed areas around the country. About 8,700 of the "opportunity zones" have been set up in all 50 states and to lure investors and developers with tax breaks. (AP Photo/Julio Cortez)
In this April 26, 2018, photo the facade of a former bank is seen behind steel beams holding it up during during construction in a so-called “opportunity zone” in Newark, N.J. According to plans OCA Architects, the new building, which is at 505 Clinton Avenue, will be a four story building, approximately 31,721 square feet with 27 one and two bedroom units. Program components for the building include a cafe, performance space, laundry room and workshops. (AP Photo/Julio Cortez)
In this April 26, 2018, photo a woman pushes a cart as she walks along side of the facade of a former bank held up by steel beams during reconstruction in a so-called “opportunity zone” in Newark, N.J. The Trump administration on Friday, Oct. 19, proposed rules for investors in a new program that it says could have a big impact on economically depressed areas around the country. About 8,700 of the "opportunity zones" have been set up in all 50 states and to lure investors and developers with tax breaks. (AP Photo/Julio Cortez)
In this May 3, 2018, photo traffic signs are blocked by signage near construction at the New Jersey Turnpike entrance near Route 1 & 9 in a so-called “opportunity zone” in Newark, N.J. The Trump administration on Friday, Oct. 19, proposed rules for investors in a new program that it says could have a big impact on economically depressed areas around the country. About 8,700 of the opportunity zones have been set up in all 50 states and to lure investors and developers with tax breaks. (AP Photo/Julio Cortez)
In this April 26, 2018, photo a man walks by a closed restaurant along Bergen Street in a so-called "opportunity zone" in Newark, N.J. The Trump administration on Friday, Oct. 19, proposed rules for investors in a new program that it says could have a big impact on economically depressed areas around the country. About 8,700 of the opportunity zones have been set up in all 50 states and to lure investors and developers with tax breaks. (AP Photo/Julio Cortez)
In this April 26, 2018, photo construction of the new Newark Turnpike bridge is seen at a distance as vehicles drive on Route 7 in a so-called “opportunity zone” in Kearny, N.J. The Trump administration on Friday, Oct. 19, proposed rules for investors in a new program that it says could have a big impact on economically depressed areas around the country. About 8,700 of the "opportunity zones" have been set up in all 50 states and to lure investors and developers with tax breaks. (AP Photo/Julio Cortez)
In this April 26, 2018, photo boards cover up the back of a building near the foundation of a construction site in a so-called “opportunity zone” in Newark, N.J. The Trump administration on Friday, Oct. 19, proposed rules for investors in a new program that it says could have a big impact on economically depressed areas around the country. About 8,700 of the "opportunity zones" have been set up in all 50 states and to lure investors and developers with tax breaks. (AP Photo/Julio Cortez)
In this April 26, 2018, photo the facade of a former bank is seen behind steel beams holding it up during construction in a so-called “opportunity zone” in Newark, N.J. According to plans OCA Architects, the new building, which is at 505 Clinton Avenue, will be a four story building, approximately 31,721 square feet with 27 one and two bedroom units. (AP Photo/Julio Cortez)
In this May 3, 2018, photo a worker uses a digger at a construction site in a so-called “opportunity zone” in Belleville, N.J. The Trump administration on Friday, Oct. 19, proposed rules for investors in a new program that it says could have a big impact on economically depressed areas around the country. About 8,700 of the "opportunity zones" have been set up in all 50 states and to lure investors and developers with tax breaks. (AP Photo/Julio Cortez)
In this April 26, 2018, photo vehicles drive along Fish House Road near elevated train tracks at a draw bridge in a so-called “opportunity zone” in Kearny, N.J. The Trump administration on Friday, Oct. 19, proposed rules for investors in a new program that it says could have a big impact on economically depressed areas around the country. About 8,700 of the "opportunity zones" have been set up in all 50 states and to lure investors and developers with tax breaks. (AP Photo/Julio Cortez)

WASHINGTON — The Trump administration is proposing rules for investors in a new program that it says could have a big impact on economically depressed areas around the country. About 8,700 so-called "opportunity zones" have been set up in all 50 states to lure investors and developers with tax breaks.

The rules from the Treasury Department, issued Friday, lay out the period of time that individuals or companies must hold on to their investments in the zones to avoid paying taxes on resulting profits.

Administration officials say the goal of the program, established by the new tax law enacted last December, is to create businesses and jobs in low-income areas and lift residents out of poverty. Treasury Secretary Steven Mnuchin predicts that $100 billion in private capital will be invested in the new zones.

"This incentive will foster economic revitalization and promote sustainable economic growth," Mnuchin said in a statement.

But some critics say the new rules and the way the program is set up will benefit real estate developers and Wall Street funds, and will pull investment toward more well-off areas that need it least.

"The real estate industry is completely excited and mobilized about this, and now is getting paid through massive tax cuts," said Timothy Weaver, a professor at the State University of New York in Albany who has studied similar development programs.

He said the program "doesn't have much of an effect other than giving tax breaks to people who are going to invest anyway."

Under the rules, the investments are open to individuals, corporations, partnerships and real estate investment trusts. Any kind of business or real estate development is qualified so long as it isn't deemed by regulators to contribute to vice — a liquor store or massage parlor, for example. Participants can take their profits from unrelated investments and plow them into an opportunity zone fund, avoiding paying taxes on those gains until the end of 2026. Depending on how many years they hold the investment, they can reduce their eventual tax bill by up to 15 percent.

Investments within the zones held for 10 years or more are entirely free of capital gains taxes.

A new rule sets up a 70-30 split for determining if certain businesses are eligible for the tax break. Provided that at least 70 percent of a business's "tangible" property sits within a zone, it is considered eligible even if the rest is outside the zone. An example would be individual locations of a restaurant chain, some inside and some outside.

With 30 percent of the properties allowed outside the zones, many of the new jobs could come in already booming areas, Weaver suggested. Conventional economic development programs generally require all of a business's property to be within the affected area, he said.

Brett Theodos, principal research associate at the Urban Institute, estimates that only about 10 to 15 percent of the zones will attract investment, and that around 10 percent could get 90 percent of the money invested.

The 8,761 census tracts — in every state, the District of Columbia and five U.S. territories — now officially beckoning to investors as opportunity zones encompass some 35 million people. Based on Census data, the zones have an average poverty rate of about 32 percent, compared with the national average of 17 percent.

Governors in the states and territories put forward their choices for areas to become special development zones. Every choice — 100 percent of the areas proposed — was blessed by the Treasury Department after a four-month review.

The choices "indicate only minimal targeting of the program toward disadvantaged communities with lesser access to capital," Theodos wrote in a research paper. "Low- and moderate-income residents will need to be able to afford to remain in their communities as the areas upgrade and not be displaced, if they are to benefit from the gains opportunity zones bring."

Census tracts were eligible to become opportunity zones if their residents meet average low-income requirements. Some tracts with higher average incomes were allowed if they're located next to the low-income tracts. Those better-off areas, with more infrastructure and amenities, could be more attractive to investors.

The mix will work out well, as Maurice Jones, the president of Local Initiatives Support Corp., a community development organization, sees it.

"From our perspective, the governors did a really fine job in picking places that are in distress," Jones said in an interview.

The program has drawn bipartisan support. Even Democratic lawmakers, who fiercely opposed the tax legislation and unanimously withheld their votes for it, do like the opportunity zones program nestled within it.

Supporters see the estimated $9.4 billion in lost revenue from the program's tax breaks as a small price — for U.S. taxpayers indirectly — to pay.

___

To read the proposed rules: https://www.irs.gov/pub/irs-drop/reg-115420-18.pdf

Must Read

WHY IT MATTERS: The Role of Government

Aug 31, 2016

It's the Goldilocks conundrum of American politics: Is the government too big, too small or just...

Stocks rise as US jobs report puts Fed rate hike...

Sep 2, 2016

Stock rose and the dollar fell on Friday after a key report showed the U.S. economy added slightly...

Brazil's ousted president blasts process, talks...

Sep 2, 2016

Brazil's ousted president blasts the process that led to demise and says she is not going away

Rio Paralympics saved by last-minute government...

Sep 5, 2016

When the curtain comes up for 4,300 athletes at Wednesday's opening ceremony of the Paralympics,...

Global stocks drift amid US economy worries

Sep 7, 2016

World stock markets meandered Wednesday after a weak report on U.S. service companies added to...

About Us

The World Insiders brings you exclusive coverage from across the globe in a timely, easy to consume format sourced directly from our regional media partners.

Contact us: sales[at]theworldinsiders.com

Subscribe Now!