TWO census tracts that make up roughly half of the City of Fredericksburg were designated last December as Qualified Opportunity Zones. The federal program will allow investors to reap tax benefits from any capital gains they earn from investments in “all the land west of U.S. 1, in addition to a small section east of U.S. 1 in the northern part of the City between the canal and river.”
Opportunity zones, which were added to the federal tax code by the Tax Cuts and Jobs Act in December 2017, are administered by the U.S. Treasury Department to encourage investment in economically-distressed communities. The IRS allows partnerships or corporations to set up Qualified Opportunity Funds that invest in such areas, allowing individual investors to participate even if they don’t live, work or own a business in the zone.
Low-income communities in Caroline, Culpeper and Spotsylvania counties have also been designated as Qualified Opportunity Zones. Investors are allowed to roll over capital gains from recently sold investments within 180 days, and then defer 10 percent of any new capital gains taxes they owe for five years, or defer 15 percent if they hold the investment for seven years.
And if they keep their money invested for the full 10 years, “the investor would be eligible for an increase in its basis equal to the fair market value of the investment on the date that it is sold,” which eliminates capital gains altogether, according to the Treasury Department.
More than 8,700 communities in the U.S. have been designated as Opportunity Zones, which are expected to attract up to $100 billion in capital investment nationwide. However, investor uncertainty over what kind of investment qualifies for the tax breaks left many on the sidelines. The Treasury Department recently clarified its guidelines regarding investor funding of small businesses that export goods and services from outside the zone.
Previously, a business in an Opportunity Zone had to earn a minimum of 50 percent of its gross income within the zone, making it difficult for some small start-ups or tech companies with a geographically diverse customer base to qualify. Treasury officials now say that such companies qualify if at least 50 percent of employee hours are spent within the zone, or at least half of all wages are paid to employees who live within it.
“This incentive will foster economic revitalization, create jobs and spur economic growth that will move these communities forward and create a brighter future,” Treasury Secretary Steven Mnuchin said in a statement.
That’s already beginning to happen in Fredericksburg.
“There has been significant interest in this program from potential investors. We expect it to be an impactful program for the City of Fredericksburg—giving people another reason to invest in our great community,” Bill Freehling, director of economic development and tourism for the City of Fredericksburg, told The Free Lance–Star.
Opportunity Zones give local investors a great way to reduce their federal capital gains taxes while at the same time helping to support businesses that create jobs and economic opportunity in sections of their own communities that are in most need. These are businesses that can’t rely on venture capitalists from Silicon Valley to help them grow. But they should be able to rely on their neighbors.
People in the area with money to invest who want to reduce their own tax bills, but also want to make a real difference by offering a “hand up instead of a handout,” should seriously look into this opportunity to do both.