Since their enactment in the Tax Cuts and Jobs Act of 2017, Opportunity Zones have proven an immensely valuable tool for community development. Both for investors and communities themselves, Opportunity Zones provide long-term benefits for those that utilize the program.
On a national scale, there are approximately 8,700 Opportunity Zones today, which cover roughly 12% of all census tracts throughout the United States. Opportunity Zones can be found in all 50 states, the District of Columbia, and a total of five U.S. territories.
With so much to consider when it comes to investing in Opportunity Zones, we’ve noted some of the most important highlights about this impactful incentive program.
What is an Opportunity Zone?
At their core, Opportunity Zones are an investment tool aimed at generating investment and economic development in designated low-income communities. First established as a federal program in 2017, Opportunity Zones provide investors with the opportunity to defer or eliminate taxes on funds that they’ve generated from selling property - including real estate, stocks, art, and more. The money is then placed into qualified opportunity funds (commonly known as QOF) to be invested in real estate projects or businesses that reside within a designated Opportunity Zone.
Opportunity Zones can be found in a variety of designated census tracts located within economically-distressed communities. In order to be identified as an Opportunity Zone, each census tract must be added to the federal tax code, and must meet one of three criteria (defined by both median income family and poverty) under the definition of “low income community”.
Within these communities, new investments will have the possibility, under certain conditions, to be eligible for preferential federal tax treatment or preferential consideration for federal grants and programs. While all Opportunity Zones are alike in that they share the same low-income definition, they are known to vary greatly from census tract to census tract.
What is there to know about California Opportunity Zones?
Like many states throughout the nation, California has grown to include a large variety of Opportunity Zones throughout the state. Though no two Opportunity Zones are exactly the same, and they each have a unique range of needs, assets, and community-based interests, California’s Opportunity Zones in particular have been designed to support new investments in the following areas: environmental justice, sustainability, climate change, and affordable housing.
To date, California has established a total of 879 Opportunity Zone census tracts across 57 counties. 17 of those Opportunity Zones overlap with a federally-recognized tribal area, and 29 of the state’s metropolitan statistical areas hold at least one Opportunity Zone. California is known to offer a unique array of opportunities for both public and private investors to make community-level impact in key areas of economic need.
In California’s initial days of establishing Opportunity Zones, the state worked closely with local government entities to ensure that potential census tracts accurately fit the federal criteria to be identified as a census tract in economic distress.
In considering some additional statistics related to California’s Opportunity Zones, it’s worth noting that at 34.2%, the average poverty rate is approximately 20 percent higher than the statewide average. Additionally, the $37,252 median family income of a California Opportunity Zone is just half of the statewide average, and California’s 879 Opportunity Zones are known to make up nearly 10% of the entire nation’s federally designated Opportunity Zones.
Interested in where California’s Opportunity Zones can be found? The state has developed its own interactive, online mapping tool to easily pinpoint California Opportunity Zones. As evidenced in the mapping tool, investors can expect to find them in any and every region across the state.
Where are Opportunity Zones in Sacramento?
Much like the rest of the state, there is certainly no shortage of Opportunity Zones in Sacramento County. While the city of Sacramento itself has grown to have 29 Opportunity Zone census tracts, the county as a whole has received Opportunity Zone designations on 15 census tracts.
A Sacramento County Opportunity Zone map can be found here.
What benefits do Opportunity Zones offer?
There are many benefits tied to the implementation and use of Opportunity Zones – including federal tax incentive, federal priority consideration, and community convening.
Federal Tax Incentive
Investors can reap the benefits of federal tax incentives, so long as eligibility requirements are met and invested capital gains are made through a Qualified Opportunity Fund. The use of a QOF ensures that investors are able to qualify for tax benefits, though it’s also important to note that the QOF must be established for the sole purpose of investing in Opportunity Zones. As an added bonus, investors are not required to live, work, or own an existing property in an Opportunity Zone in order to meet these eligibility requirements.
Because an investor’s QOF acts as the means for investment, 90% of assists from a QOF must be invested directly in an Opportunity Zone property. As many investors have learned, this property can also include a Qualified Opportunity Zone Business (QOZB), if desired.
California currently holds the nation’s leading spot for Opportunity Zone equity. With QOFs continued growth throughout the state, a unique opportunity remains for private capital to be able to finance both community and economic development in the communities that need it most.
For simple reference, we’ve broken down the specific tax benefits of Opportunity Zone investments, here:
- Tax Deferral: If an investor has invested in a Qualified Opportunity Fund, they reserve the right to defer the tax on some (or all!) of a capital gain through 2026.
- Step-up in Tax Basis: Those who defer gains through a Qualified Opportunity Fund investment can expect to receive a 10% step-up in tax basis after five years, plus an additional 5% step-up after seven years.
- No Tax on Appreciation: By remaining in the Qualified Opportunity Fund for at least 10 years, the cost basis of the property is equal to the fair market value on the date of the sale or exchange.
Federal Priority Consideration
After a realization that public investment in Opportunity Zones offers truly impactful, much-needed support to communities in economic distress (as per the IRS definition), federal priority consideration has since come to be known as another key Opportunity Zone benefit. In fact, at this time, the federal government has identified more than 270 federal programs, loans or grants which could provide targeting, preference, and additional support to Opportunity Zones.
Whether its selective technical assistance, preferential grant program application review, or another form of priority consideration, the support of Opportunity Zones on a federal level has become evident.
Additionally, California’s Opportunity Zones in particular are in close alignment with the state’s place-based designations that support low-income communities and households. As a result, these alignments offer an additional outlet for communities to combine both federal and state investment in a way that best supports its local projects.
Perhaps considered one of the most impactful benefits, Opportunity Zones can act as an avenue for jumpstarting the important conversation of both community and economic development at a local level. Simply put, they provide an opportunity for unique partnerships to form, all with a common denominator of driving economic development projects that align with community-level goals and vision.
When local Opportunity Zone stakeholder meetings take place across the state, they often include a variety of demographic groups that may have little background in mainstream economic development. In fact, GO-Biz’s 2020 Annual Convening noted a total of sixteen different organization types all with a myriad of different interests – including but not limited to broadband infrastructure, small business financing, health clinic construction, and affordable housing. Entities that may have otherwise never had the right opportunity for collaboration are now working together for the long-term benefit of the community.
While each of these Opportunity Zone benefits are unique and worthwhile in their own way, together, they can be leveraged to support a multitude of impactful projects.
How can communities benefit from Opportunity Zones?
Though there’s undoubtedly plenty of benefits for both investors and stakeholders, communities themselves benefit immensely from Opportunity Zones, too. Given that the overall goal of Opportunity Zones is to enhance economic development and job creation amongst distressed communities, it’s evident that the socioeconomic well-being of these communities can improve greatly, in turn. The opportunity to attract investment and financial support for businesses, housing, commercial development, and infrastructure projects can truly impact the future for the areas that need it most.
These in-need communities are measured in a few different ways. Here’s what leads communities to be identified as an Opportunity Zone:
- High Poverty Rate: On average, Opportunity Zones are known to have a 27.7% poverty rate, which is significantly higher than the national 14.1% poverty rate.
- Persistent Poverty: Though Opportunity Zones account for just one-quarter of the nation’s low-income census tracts, they make up 38% of all United States census tracts that have been persistently poor since 1980 – or longer.
- High Unemployment: Approximately 31% of prime-age adults living in Opportunity Zones are unemployed. The national rate, in comparison, is 22%.
- High Housing Vacancy Rate: Though the national average housing vacancy rate is just 8%, Opportunity Zone housing vacancy runs a bit higher, at 13%.
- Older Housing Stock: In most Opportunity Zones, the housing is recognized as being much older than that of non-zoned areas. For instance, in an average Opportunity Zone, the median home was built 50 years ago, which is more than 10 years before the median residence nationally.
- Low Home Values: Unlike many of the nation’s communities, the median home is worth less than $100,000 in at least 43% of Opportunity Zones.
- Low Homeownership Rate: The national homeownership rate falls at 64%, significantly higher than that of most Opportunity Zones. On average, an Opportunity Zone homeownership rate lies at 46%.
- Limited Economic Mobility: When comparing economic mobility in children from poor backgrounds in Opportunity Zones to those elsewhere, the numbers noticeably differ. On average, just 7.3% of children born to poor parents in the average opportunity zone were able to climb into the top fifth of the income distribution during adulthood - the average for poor children outside of Opportunity Zones is higher, at 13.2%.
- High Prevalence of Brownfield Sites: Opportunity Zones are known to contain nearly 32% of the nation’s brownfield sites – or properties that have been contaminated by prior use and often stand vacant for years (or decades!). In fact, in total, the country’s opportunity zones contain over 14,000 known brownfield sites.
When taking each of these measures into consideration, it becomes especially evident as to why these particular communities can be drastically strengthened and improved through Opportunity Zone investments.
Whether you’ve considered investing in an Opportunity Zone, know someone who has, or simply hope to learn more about how these communities are benefitting for the long-haul, we hope you’ve found this information helpful. Whether it’s a downtown or industrial area, or a rural or suburban zone, communities everywhere have the potential to change, grow and develop for the better with the help of Opportunity Zone investments.
You can find a link to the California Opportunity Zones portal on our website. If you’re looking to focus your search on Sacramento County specifically, economic.saccounty.net is a valuable resource.
Have additional questions about tax benefits and IRS topics related to investing in an Opportunity Zone? Visit www.irs.gov for an overview of Frequently Asked Questions.