FAQ: How will the federal 'opportunity zones' tax incentives work in Maryland?

Investors in Maryland and across the U.S. could stand to get significant tax breaks through a new “opportunity zones” program. The federal tax incentives, part of tax reform, were designed to funnel investment into economically distressed communities over the next decade, spurring job creation and economic development.

In Maryland, 149 zones were selected by local and state officials and approved by the U.S. Treasury Department in in April.

But the idea is unproven, and critics worry it will benefit wealthy investors, not communities that need help most.

Here are some details about the program:

What are “Opportunity Zones?”

These zones are designated census tracts in which new investments may be eligible for preferential tax treatment. To qualify, an area must be a low-income tract with a poverty rate of at least 20 percent and median family income no greater than 80 percent of area median. Adjacent tracts qualify, too. Each state was allowed to place a quarter of eligible areas in the program, and the Treasury Department certified more than 8,700 communities in all 50 states. Officials said they picked areas that showed both a need and the opportunity for investment.

Who can invest in the zones?

Tax benefits are available to individuals, corporations, real estate investment trusts, partnerships and other entities that invest in businesses or property in zones, using vehicles known as “opportunity funds.”

What are the tax benefits for investors?

Investors can get relief from taxes on capital gains in two ways. First, taxpayers who put capital gain profits in an opportunity fund can defer paying taxes on those profits until as late as 2026. Second, investors would pay no taxes on capital gains on their opportunity fund investment — if the taxpayer holds that investment for at least 10 years.

The Treasury Department has proposed guidelines that would allow taxpayers to keep investments in opportunity funds through 2047 without losing tax benefits, even though the zone designation is good for 10 years.

What kind of investments could be made in communities?

Opportunity funds can invest in any type of real property, commercial or residential, operating business or equipment within a zone. The program was designed to be flexible to fit varying needs of communities. But there are some exceptions. No investments are allowed in private or commercial golf courses, country clubs, massage parlors, hot tub or suntan facilities, racetracks or other gambling complexes or any store selling alcoholic beverages.

How does the program work?

Once a qualified opportunity fund is set up, it can accept taxpayers’ capital gains investments. Funds can invest in communities in different ways. For example, they might put equity into or buy the stock of a company, as long as most of the company’s property is located in a zone. Or a fund could take an interest in a partnership that operates in a zone.

Funds can buy or invest in property, including real estate or infrastructure, as long as the property is used for a business. One fund can invest across multiple zones.

The Economic Innovation Group, a proponent that helped craft the program, says safeguards are being built in. For instance, a fund must “substantially” improve existing property to get the incentive, a way to keep investors from just parking their money in real estate.

Where are Maryland’s zones?

You can find a map here.

What are the government’s projections for the program?

Treasury officials say they expect $100 billion in private capital to flow into the zones, creating jobs and economic development.

lorraine.mirabella@baltsun.com

twitter.com/lmirabella

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