Opportunity zones created by federal legislation explained
PARKERSBURG — Opportunity zones were created as part of the Tax Cuts and Jobs Act in December 2017, but potential investors and advisers are still learning how they might best be utilized.
“The idea behind an opportunity zone is to incentivize individuals who own an asset … to sell that asset and invest those capital gains in distressed areas,” said John Stump, attorney with Steptoe & Johnson in Charleston, during a recent presentation on the topic in Parkersburg City Council chambers.
Capital gains are earned when an investment — such as a stock or building — increases in value. It’s estimated that there are trillions of dollars in unrealized capital in the United States because of investors holding on to assets, Stump said.
“A lot of properties have been owned by families for generations because they don’t want to incur the capital gains” tax, Stump said.
Opportunity zones seek to draw out that money by allowing the taxes to be deferred until the end of 2026 if the gains are invested, within 180 days, in a project in a designated zone. The tax rate is discounted by 10 percent after five years and a total of 15 percent after seven. If the investor holds the new investment for 10 years, there is no tax on its capital gains for that period.
“If somebody has an idea for a business and you want to start a business, boy, you sure would want to do it in an opportunity zone,” Stump said. “If the property goes up in value, at the end of the day, (you have) enormous upside potential.”
Parkersburg Mayor Tom Joyce invited Stump to make the presentation after speaking with him about the topic at a West Virginia Municipal League event. More than two dozen people attended the session, before the Jan. 22 City Council meeting.
The governor’s office designated 55 opportunity zones across the state last year, two of them in Wood County. One includes Parkersburg’s downtown central business district north to Vienna, and the other goes east along Seventh Street to West Virginia 47.
Parkersburg Development Director Rickie Yeager said city officials were consulted by the state on the local designations. Downtown was recommended because of the number of vacant buildings and the need for housing on the upper levels, while Seventh Street is a major commercial thoroughfare.
“Having an opportunity zone in place gives another financial incentive to help support small businesses if there’s a chance they’re going to grow,” Yeager said.
To invest capital gains in an opportunity zone, a Qualified Opportunity Fund must be created.
“There are banks that have half-a-billion-dollar funds targeting opportunity zones,” Stump said. “It can (also) be as simple as a limited liability company with one member.”
There are a wide range of acceptable opportunity zone investments, including startups, affordable housing, rental housing, parking facilities, hotels, restaurants, manufacturing and offices, Stump said. “Sin” businesses, like those involving alcohol and gambling, are excluded.
“It must be an equity investment,” Stump said. “You can’t make a loan.”
In response to a question from a Parkersburg resident, Stump said people investing in properties they already own in an opportunity zone can benefit, but there must be a substantial improvement to it.
Stump said an opportunity zone won’t turn a bad investment into a good one, but it could help a marginal project become successful or make a successful one even more lucrative based on where it’s located.
While there is plenty of interest in opportunity zones, Stump said, there hasn’t been a lot of action on such projects in West Virginia because final rules are still being drafted at the federal level.
David Tenney, managing director for Tenney & Associates accounting and business consulting firm, said he has clients interested in opportunity zone projects.
“I’m working with a couple right now,” he said following the presentation.
Michele Wilson, executive director of workforce and economic development for West Virginia University at Parkersburg, said after the meeting that she serves on several committees throughout the area and believes opportunity zones could be beneficial.
“I think when you invest in these distressed areas, there’s always opportunity to grow our region economically,” she said.
Primary Benefit of Opportunity Zones
* Deferral: Investor can defer taxes on capital gains until 2026 by investing realized gains in a Qualified Opportunity Fund.
* Reduction: Tax liability on deferred gains reduced by 10 percent at five years and an additional 5 percent at seven years.
* Exclusion: Any appreciation in Qualified Opportunity Fund investment accrues tax-free if held at least 10 years.