Opportunity Zones are census tracts generally composed of economically distressed communities that qualify for a community development program called the Opportunity Zone program, which was created under the Tax Cuts and Jobs Act of 2017. Under this program, low-income census tracts are nominated by state governors and the mayor of the District of Columbia and certified by the US Department of the Treasury as qualified Opportunity Zones targeted for economic development. Up to 25% of census tracts in each state and the District of Columbia that meet qualification requirements can be designated as Opportunity Zones. Areas certified as qualified Opportunity Zones retain their designation for ten years. There are more than 8,700 qualified Opportunity Zones in the US.
To qualify as an Opportunity Zone, a census tract must meet the following requirements as defined by US Internal Revenue Code Section 45D(e):
- A poverty rate of at least 20%; or
- A median family income of no more than 80% of the statewide median family income for census tracts located in non-metropolitan areas, or a median family income of no more than 80% of the greater of statewide median family income or metropolitan median family income for census tracts located in metropolitan areas.
Up to 5% of census tracts in each state and the District of Columbia that don’t meet the requirements of the program can be designated as Opportunity Zones if they meet the following requirements:
- A location that is contiguous with a qualified Opportunity Zone that meets the low income requirements.
- A median family income of no more than 125% of the median family income of the adjacent qualified Opportunity Zone.
Those who invest in qualified Opportunity Zones through qualified Opportunity Funds can potentially receive federal tax incentives for capital gains.
- How Opportunity Funds Could Boost Real Estate Investment Returns
- What are the Tax Incentives of Investing in Opportunity Zones?
- Opportunity Fund or 1031 Exchange: Which Offers Better Tax Advantages for Real Estate Investors?