I believe the way that the program works is you can defer taxes from your original capital gains (and the cost basis gets increased so your deferred taxes are less than you would pay otherwise), reinvest them in an "opportunity zone", and not pay capital gains on your investment on the opportunity zone, if you hold it long enough
e.g. Bob bought Apple stock for $50 a share back in the day, and sells it for $200/share. He defers his taxes until 2026. Instead of paying capital gains tax on $150/share, the cost basis is adjusted by 15% so in addition to benefiting from the time value of money, future Bob will only be taxed on $142.50 of capital gains. Bob can buy a house in an "opportunity zone" (from scrolling around the embedded map, there's plenty of million dollar+ houses in these areas. There's also lots of sports teams and stadiums in these areas, so maybe Bob buys an NFL team or a parking lot next to their stadium), rent it out for 10 years, sell it, and not have to pay any capital gains tax on the appreciation. Definitely not a bad deal for him!
Close - but Bob in your example also has to improve the basis of whatever he buys by 100% within a 30 month period. So that could be a major renovation of the house, building another unit on the property, scraping and rebuilding etc.
Unfortunately it's not as easy as parking money and riding off into the tax free sunset. As I mentioned down thread, we should hopefully have the first set of regs from Treasury even as soon as tomorrow which will clarify a lot of the loose ends as written in the initial legislation.
Some of what we're waiting to see is whether or not that basis improvement includes the land value or if you can split that out. If the home Bob purchases for $300k is on a lot worth $250k, does he have to spend the full $300k to improve it, or just $50k to improve the basis of the structure?
Lots of details to still work out but hopefully we'll know more shortly.
OZs are the Wild West right now... There is no clear guidance on what is allowable and what is not. If you want to invest through this mechanism, it may be better to hold off or the IRS may come knocking on your door in a few years.
Buying real estate for personal use would seem like undermining the spirit of the OZ legislation. I don't think it will fly...
What irks me about this article is its sole narrative on billionaires helping billionaires. Nowhere in the regs does it say that somebody with a $100 gain couldn't invest that into a project.
Granted there are other regulatory issues that will limit a lot of this activity to accredited investors (via Reg D private placements), but OZ regs have nothing to do with a persons net worth or income.
As other posters have commented, the benefits are three fold - deferring your gain until the end of 2026, a 10% step up in basis on the gain if you hold for 5 years, an additional 5% step up if you hold for a full 7 years, and an exemption on tax for the appreciation of the assets you've invested in if you hold them for 10 years.
When you have more money or capital assets, more of your income comes from capital gains and less comes from the labor you do. So decreasing taxes on capital gains disproportionately benefits people who are already wealthy.
"Poor people are just as free to avoid taxes on their long-term investments in illiquid capital-intensive projects as millionaires and billionaires" is not a take I expected to see, but thank you HN for proving me wrong.
That's the slice of EPA west of the freeway. Yes, the Four Seasons is there, but it's legitimately an impoverished area compared to surroundings. Compare the run-down apartments on Woodland against the neighborhood in PA across the creek. Seems like a legitimate OZ.
My worry. As was mentioned in the article these billionaires have teams of lawyers / accountants working to ensure the money stays in their hands. What's keeping them from having those teams of lawyers concocting vapor-corps in these opportunity zones (or whatever the loophole is) which will make little to no positive (and maybe negative) impact on the opportunity zone while ensuring the billionaires keep the incentives regardless.
EDIT: Or worse yet there will be organizations whose sole purpose is to take in billionaires money, do as little work as possible, and generate enough paperwork to ensure the billionaires qualify for the tax incentives.
Probably massive amount of money to be made by a company that can systematize this whole process. They know the laws and the codes, they know what gets returns in some areas and not others. I predict cookie cutter improvements being dropped into these zones at some point as everyone figures out where works and what doesn't. It will be interesting to see how this plays out.
And this would be ... a spectacularly good outcome.
In order to do this, the company would have to develop a workable, repeatable model of how to economically improve an "opportunity zone". There's some evidence that this is a very hard problem, notably that social service agencies have been trying to do it for more than 100 years. But sure, if a company can find a solution, that would be great.
The danger is that the company would find a solution that somehow followed the letter of the law but not the spirit, like finding an investment with nominally high returns that doesn't actually improve the lives of the people living in the opportunity zones. That's definitely a danger, and possibly a likely outcome. But another possibility is that there are fairly straightforward ways to improve the lives of people in these zones that haven't happened because the people in them don't have the capital to do it. If that's the case, then incentivizing outsiders to put in that capital should be a good thing. I don't know what will happen, but it seems like it's worth a try.
It would be nice if the program was well managed, because good management could probably reduce and mitigate the negative gaming-the-system outcomes and promote the good ones. But I don't have a lot of confidence in Congress to do a good job with updates, so I hope the original bill was written well enough.
The devil is in the details. What's the definition of an "opportunity zone", for instance?
We already have a similar program for EB-5 visas; the definition of economically challenged area is often an up-and-coming area gerrymandered to include just enough poor people.
Opportunity zones are state-selected census tracts. I am more curious about the required "opportunity fund". I have not seen a good definition for that yet.
Israel had (maybe still has?) what was called “angel
taxing” which said investment in a startup (for some definition of startup) is optionally marked to zero at the point of investment, which means that if you had any gains, you could net them against this investment.
This is the opposite of deferring capital gain taxes - it is pulling capital losses forward. If the startup folds, the marking down is justified. If it is successful, the capital gains when eventually selling it reflect the zero base; so overall, taxes stay the same except it incentivizes capital investments immediately after capital gains.
A good chunk of Olympic National Park seems to be an opportunity zone. Can anyone fill me in on what an 'investment' there might entail? IIRC, commercial activities are usually heavily restricted in national parks.
Doesn't look like the park itself is an OZ. OTOH, the OZ west of the park seems to be reservation land, which likely brings its own set of problems when it comes to investing.
So in the midst of an investment boom we are engineering ways not only to reduce tax on gains, but to ensure the gains will be reinvested. Yet at the same time this provides no value if people pull out their investments in a down-market. Sounds like A bubble-policy.
Pioneer Square is not a hot location; all of the tech action is happening to the north in SLU and a bit into the downtown retail core. Pioneer Square is a dump and sketchy as hell.
I'm skeptical as we've seen with folks like the Kushners plenty of folks will build some fancy high end / highly profitable development "near" places that could use some improvement.... but they don't really help anyone in those zones.
Who decides what is an OZ or not? I honestly would be surprised if the person(s) who gets to decide what is or isn't an OZ now and in the future hasn't already been bribed by an interested investor.
Agreed, it's very silly. No one attacks people in the upper middle class for using mortgage deductions, tax advantaged investment vehicles (ie 401Ks), education accounts, tax loss harvesting etc to minimize tax burden; however, whenever a wealthy person tries to minimize their tax burden, they are immediately judged. It is not reasonable to state that one group of people can take advantage of tax code incentives and other groups cannnot.
It looks like there is an opportunity to reduce the taxes owned on the initial capital gain as well as avoid all taxes on the additional capital gain if held long enough.
Because nobody got rich by spending on the poor. It's the lie at the heart of every trickle-down scheme and corrupt charity: that all we need to do is give wealthy people a little bit more, and we'll all somehow benefit from it.
Absent a vocal minority, wealthy people spend their money in ways that make them more money or get them more political power. They don't build communities, they build dynasties.
From an introductory pdf [1]: "A qualified Opportunity Fund is a privately managed investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (the vehicle must hold at least 90 percent of its assets in such property)".
Okay, so here's my prediction: a series of shell corporations will be constructed so that the investors are essentially moving their money around on their own plate. Those funds will then look for the most efficient way to produce a return on that investment, which will probably consist of purchasing real estate, pumping up its value (increasing housing costs in the region), and then dumping it at the end of the 10-year term so that the investors can get out without any tax liability. The affected communities will end up with artificial housing cost inflation followed by a slump that will leave them in just as bad of shape as they are now, at best.
It's raw, seething cynicism, yes, but it also closely matches something that's already happening right now. Communities across the country are seeing artificially high commercial rents coupled with empty storefronts in heavily-trafficked areas because real estate owners have discovered that they can make a little extra money by keeping some of the spaces empty and using them as tax deductions, instead of lowering the rent to market rate and putting a small business in there. [2]
The thing that concerns me about this is that there isn't much reason to expect the area's interests are aligned with investors' interests.
Investors build something that allows the local economy to bring money into the area - e. g. A factory of something like that with well paying jobs where workers get to keep a good chunk of their value add and a lot of the profits stay in the local economy? Great! Win win.
Investors build something that provides a bit of short term benefit but then leeches money out of the area forever after - e. g. An apartment building, low wage retail, toll roads, etc? Well it'll be great for the investor who now has a new tax free passive income steam on top of the hard assets they built (the road, apartment building, or whatever that they can later sell - again tax free - if they want). Sucks for the city though. Sure it might have been necessary, but the local economy was basically just forced to take out a loan that it will never repay - sending money to already wealth investors in perpetuity for housing or transportation or a place to buy shit.
In either case, and probably more the latter than the former, the already-hilariously-wealthy investor gets to earn fistfulls of money tax free. But only one of those situations really helps out the local economy itself. And in either case I don't see how removing a 10% or so tax on profits and deferring taxes on investment is going to massively change how or whether projects pencil out.
So yeah, in an era where the wealthy already have way too much money and don't need help hiding more of it, and they might not even be helping anyone but themselves, and they're basically doing something they probably would/should have done anyway, and they get to feel good and claim good pr for basically just making gobs of money that they don't need, yeah, I'm not feeling super proud for them or this program.
What would make me happy? Well, if they paid their damn taxes, that'd be a start. Even better if the rates actually have them paying their fair share instead of basically nothing, as is the case with capital gains tax rates today.
I'd also be happy if they spent their money lobbying for common good things - like climate change prevention, universal health care, free college, etc - instead of looser regulations and tax breaks. Some places and people do this, most don't, and some actively and vociferously work against the public good (kochs, bp, etc).
Really though I'll probably only really be happy when we don't have the obscene rates of poverty and semi poverty in the us, and we fix the floundering public infrastructure and services paired with deep government deficits. Obscene wealth is only such if its accrued in the context of millions of people living paycheck to paycheck at best, or being actively in the red month after month more typically. Likewise, it's only really selfish to try and lower your taxes if the common space is currently just ridiculously under funded - the rest of us generally pay our fair share or something like it, but a small minority of people jump through miles hoops and work tirelessly to massage the rules so they get to keep the disgusting level of wealth they accrued on the back of society entirely to themselves.
Fix those things, and they can do whatever they want with their mountains of cash - I'll probably stop caring.
> Q. What is a Qualified Opportunity Fund
A. Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an Opportunity Zone and that utilizes the investor’s gains from a prior investment for funding the Opportunity Fund.
> Q. How does a taxpayer become certified as a Qualified Opportunity Fund?
A. To become a Qualified Opportunity Fund, an eligible taxpayer self certifies. (Thus, no approval or action by the IRS is required.) To self-certify, a taxpayer merely completes a form (which will be released in the summer of 2018) and attaches that form to the taxpayer’s federal income tax return for the taxable year. (The return must be filed timely, taking extensions into account.)
> The fund must hold at least 90 percent of its assets in Qualified Opportunity Zone Property
The benefit is for investing capital gains into OZ's, not necessarily from selling assets that are in existing OZ's. So if you had a gain on your house (beyond the homeowner exclusion) you could potentially invest the remainder of that gain into an OZ project and get those benefits.
There are all sorts of stipulations you need to follow to qualify however - not all of which are fully in place yet from Treasury. We should be getting the first version of the regs as soon as tomorrow (imminent we've heard from folks in DC) and then we'll know more. Things like having to improve the basis of whatever you invest in by 100% within a 30 month period exist, so you can't just buy something in an OZ and park it, you have to actually do some improvement to what you purchase.
You have to make a 100% investment above your acquisition cost, so you probably cannot benefit unless you can sell it to an housing investor who could do that.
Using the map in the article I was intrigued to discover that my home isn't in an 'opportunity zone' but if it were located 30 feet to the right it would be. That may explain why my neighborhood has been infested with signage for cash-up-front house sales (which I have been systematically removing).
If someone were to directly buy a distressed property in one of these zones using money from capital gains, and fix it up (and even live there for 5-10 years), would they realize the same tax benefit as investing in a "fund"?
The Opportunity Zone program is designed to provide tax incentives to investors who fund businesses in underserved communities.
Investors are able to defer paying taxes on capital gains that are invested in Qualified Opportunity Funds that in turn are invested in distressed communities designated as Opportunity Zones by the governor of each state. Up to 25 percent of the low-income census tracts in each state can be designated as Opportunity Zones.
[+] [-] Rebelgecko|7 years ago|reply
e.g. Bob bought Apple stock for $50 a share back in the day, and sells it for $200/share. He defers his taxes until 2026. Instead of paying capital gains tax on $150/share, the cost basis is adjusted by 15% so in addition to benefiting from the time value of money, future Bob will only be taxed on $142.50 of capital gains. Bob can buy a house in an "opportunity zone" (from scrolling around the embedded map, there's plenty of million dollar+ houses in these areas. There's also lots of sports teams and stadiums in these areas, so maybe Bob buys an NFL team or a parking lot next to their stadium), rent it out for 10 years, sell it, and not have to pay any capital gains tax on the appreciation. Definitely not a bad deal for him!
[+] [-] adamhooper|7 years ago|reply
Unfortunately it's not as easy as parking money and riding off into the tax free sunset. As I mentioned down thread, we should hopefully have the first set of regs from Treasury even as soon as tomorrow which will clarify a lot of the loose ends as written in the initial legislation.
Some of what we're waiting to see is whether or not that basis improvement includes the land value or if you can split that out. If the home Bob purchases for $300k is on a lot worth $250k, does he have to spend the full $300k to improve it, or just $50k to improve the basis of the structure?
Lots of details to still work out but hopefully we'll know more shortly.
[+] [-] anonu|7 years ago|reply
Buying real estate for personal use would seem like undermining the spirit of the OZ legislation. I don't think it will fly...
[+] [-] ethagknight|7 years ago|reply
[+] [-] fourcolordeck|7 years ago|reply
[+] [-] onlyrealcuzzo|7 years ago|reply
[+] [-] adamhooper|7 years ago|reply
Granted there are other regulatory issues that will limit a lot of this activity to accredited investors (via Reg D private placements), but OZ regs have nothing to do with a persons net worth or income.
As other posters have commented, the benefits are three fold - deferring your gain until the end of 2026, a 10% step up in basis on the gain if you hold for 5 years, an additional 5% step up if you hold for a full 7 years, and an exemption on tax for the appreciation of the assets you've invested in if you hold them for 10 years.
Here's a link to an ebook we just put out if anybody has interest in reading how it will work in the real estate space - https://www.realcrowd.com/blog/2018/10/the-real-estate-inves...
[+] [-] KerrickStaley|7 years ago|reply
[+] [-] tanderson92|7 years ago|reply
[+] [-] jpatokal|7 years ago|reply
Including heartbreaking scenes of crushing poverty like this: https://www.google.com.au/maps/place/DLA+Piper/@37.4595117,-...
[+] [-] Ninjak|7 years ago|reply
[+] [-] perpetualcrayon|7 years ago|reply
EDIT: Or worse yet there will be organizations whose sole purpose is to take in billionaires money, do as little work as possible, and generate enough paperwork to ensure the billionaires qualify for the tax incentives.
[+] [-] deytempo|7 years ago|reply
[+] [-] noetic_techy|7 years ago|reply
[+] [-] noahl|7 years ago|reply
In order to do this, the company would have to develop a workable, repeatable model of how to economically improve an "opportunity zone". There's some evidence that this is a very hard problem, notably that social service agencies have been trying to do it for more than 100 years. But sure, if a company can find a solution, that would be great.
The danger is that the company would find a solution that somehow followed the letter of the law but not the spirit, like finding an investment with nominally high returns that doesn't actually improve the lives of the people living in the opportunity zones. That's definitely a danger, and possibly a likely outcome. But another possibility is that there are fairly straightforward ways to improve the lives of people in these zones that haven't happened because the people in them don't have the capital to do it. If that's the case, then incentivizing outsiders to put in that capital should be a good thing. I don't know what will happen, but it seems like it's worth a try.
It would be nice if the program was well managed, because good management could probably reduce and mitigate the negative gaming-the-system outcomes and promote the good ones. But I don't have a lot of confidence in Congress to do a good job with updates, so I hope the original bill was written well enough.
[+] [-] ams6110|7 years ago|reply
[+] [-] matchbok|7 years ago|reply
[+] [-] bobthepanda|7 years ago|reply
We already have a similar program for EB-5 visas; the definition of economically challenged area is often an up-and-coming area gerrymandered to include just enough poor people.
Source with rather clickbaity introduction: https://www.citylab.com/equity/2017/05/kushner-companies-rea...
[+] [-] adamhooper|7 years ago|reply
Anything purple on there is designated an OZ.
[+] [-] heurist|7 years ago|reply
[+] [-] beagle3|7 years ago|reply
This is the opposite of deferring capital gain taxes - it is pulling capital losses forward. If the startup folds, the marking down is justified. If it is successful, the capital gains when eventually selling it reflect the zero base; so overall, taxes stay the same except it incentivizes capital investments immediately after capital gains.
[+] [-] sprashanth|7 years ago|reply
[+] [-] ur-whale|7 years ago|reply
[edit] source: https://www.policymap.com/maps?i=9964345&btd=6&period=2018&l...
[+] [-] talltimtom|7 years ago|reply
[+] [-] C1sc0cat|7 years ago|reply
That's why investing via closed end property funds is much better individual properties are very illiquid .
[+] [-] com2kid|7 years ago|reply
Aside from the crippling poverty outside the doorsteps of all the tech company offices that is. ...
[+] [-] btgeekboy|7 years ago|reply
[+] [-] duxup|7 years ago|reply
[+] [-] dawhizkid|7 years ago|reply
[+] [-] heurist|7 years ago|reply
[+] [-] dev_dull|7 years ago|reply
Thankfully the poster got it right but the headline from the article itself is very misleading. Deferring taxes != writing off investments.
Also, why does the headline writer take shots at billionaires for putting money to work in economically challenged areas?
I swear some of these people will never be satisfied with the way rich spend their money.
[+] [-] Thriptic|7 years ago|reply
[+] [-] jjeaff|7 years ago|reply
[+] [-] thaumaturgy|7 years ago|reply
Absent a vocal minority, wealthy people spend their money in ways that make them more money or get them more political power. They don't build communities, they build dynasties.
From an introductory pdf [1]: "A qualified Opportunity Fund is a privately managed investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (the vehicle must hold at least 90 percent of its assets in such property)".
Okay, so here's my prediction: a series of shell corporations will be constructed so that the investors are essentially moving their money around on their own plate. Those funds will then look for the most efficient way to produce a return on that investment, which will probably consist of purchasing real estate, pumping up its value (increasing housing costs in the region), and then dumping it at the end of the 10-year term so that the investors can get out without any tax liability. The affected communities will end up with artificial housing cost inflation followed by a slump that will leave them in just as bad of shape as they are now, at best.
It's raw, seething cynicism, yes, but it also closely matches something that's already happening right now. Communities across the country are seeing artificially high commercial rents coupled with empty storefronts in heavily-trafficked areas because real estate owners have discovered that they can make a little extra money by keeping some of the spaces empty and using them as tax deductions, instead of lowering the rent to market rate and putting a small business in there. [2]
[1]: https://eig.org/wp-content/uploads/2018/02/Opportunity-Zones...
[2]: https://www.dnainfo.com/chicago/20161006/jefferson-park/vaca..., for one example.
[+] [-] null000|7 years ago|reply
Investors build something that allows the local economy to bring money into the area - e. g. A factory of something like that with well paying jobs where workers get to keep a good chunk of their value add and a lot of the profits stay in the local economy? Great! Win win.
Investors build something that provides a bit of short term benefit but then leeches money out of the area forever after - e. g. An apartment building, low wage retail, toll roads, etc? Well it'll be great for the investor who now has a new tax free passive income steam on top of the hard assets they built (the road, apartment building, or whatever that they can later sell - again tax free - if they want). Sucks for the city though. Sure it might have been necessary, but the local economy was basically just forced to take out a loan that it will never repay - sending money to already wealth investors in perpetuity for housing or transportation or a place to buy shit.
In either case, and probably more the latter than the former, the already-hilariously-wealthy investor gets to earn fistfulls of money tax free. But only one of those situations really helps out the local economy itself. And in either case I don't see how removing a 10% or so tax on profits and deferring taxes on investment is going to massively change how or whether projects pencil out.
So yeah, in an era where the wealthy already have way too much money and don't need help hiding more of it, and they might not even be helping anyone but themselves, and they're basically doing something they probably would/should have done anyway, and they get to feel good and claim good pr for basically just making gobs of money that they don't need, yeah, I'm not feeling super proud for them or this program.
What would make me happy? Well, if they paid their damn taxes, that'd be a start. Even better if the rates actually have them paying their fair share instead of basically nothing, as is the case with capital gains tax rates today.
I'd also be happy if they spent their money lobbying for common good things - like climate change prevention, universal health care, free college, etc - instead of looser regulations and tax breaks. Some places and people do this, most don't, and some actively and vociferously work against the public good (kochs, bp, etc).
Really though I'll probably only really be happy when we don't have the obscene rates of poverty and semi poverty in the us, and we fix the floundering public infrastructure and services paired with deep government deficits. Obscene wealth is only such if its accrued in the context of millions of people living paycheck to paycheck at best, or being actively in the red month after month more typically. Likewise, it's only really selfish to try and lower your taxes if the common space is currently just ridiculously under funded - the rest of us generally pay our fair share or something like it, but a small minority of people jump through miles hoops and work tirelessly to massage the rules so they get to keep the disgusting level of wealth they accrued on the back of society entirely to themselves.
Fix those things, and they can do whatever they want with their mountains of cash - I'll probably stop caring.
[+] [-] ur-whale|7 years ago|reply
Some people will never be satisfied with the fact that there are rich people in the first place.
[+] [-] seniorsassycat|7 years ago|reply
> Q. How does a taxpayer become certified as a Qualified Opportunity Fund? A. To become a Qualified Opportunity Fund, an eligible taxpayer self certifies. (Thus, no approval or action by the IRS is required.) To self-certify, a taxpayer merely completes a form (which will be released in the summer of 2018) and attaches that form to the taxpayer’s federal income tax return for the taxable year. (The return must be filed timely, taking extensions into account.)
> The fund must hold at least 90 percent of its assets in Qualified Opportunity Zone Property
https://www.irs.gov/newsroom/opportunity-zones-frequently-as...
[+] [-] 0003|7 years ago|reply
[+] [-] TACIXAT|7 years ago|reply
[+] [-] adamhooper|7 years ago|reply
There are all sorts of stipulations you need to follow to qualify however - not all of which are fully in place yet from Treasury. We should be getting the first version of the regs as soon as tomorrow (imminent we've heard from folks in DC) and then we'll know more. Things like having to improve the basis of whatever you invest in by 100% within a 30 month period exist, so you can't just buy something in an OZ and park it, you have to actually do some improvement to what you purchase.
[+] [-] fourcolordeck|7 years ago|reply
[+] [-] ethagknight|7 years ago|reply
[+] [-] sokoloff|7 years ago|reply
Or, if local zoning doesn't block it, see if you can rent it out as commercial.
[+] [-] rdlecler1|7 years ago|reply
[+] [-] anigbrowl|7 years ago|reply
[+] [-] lr|7 years ago|reply
[+] [-] sytelus|7 years ago|reply
The Opportunity Zone program is designed to provide tax incentives to investors who fund businesses in underserved communities.
Investors are able to defer paying taxes on capital gains that are invested in Qualified Opportunity Funds that in turn are invested in distressed communities designated as Opportunity Zones by the governor of each state. Up to 25 percent of the low-income census tracts in each state can be designated as Opportunity Zones.
[+] [-] Bjartr|7 years ago|reply
[+] [-] hyprlogik|7 years ago|reply