Opportunity Zones 101: What You Need to Know

Opportunity Zones have garnered significant attention nationwide over the past year as businesses, investors, and property owners strive to understand the new federal program and how to take advantage of its benefits.

In short, Opportunity Zones represent designated areas or communities across the country that have been targeted for private investment. The President’s 2017 Tax Cuts and Jobs Act created Opportunity Zones with the objective of incentivizing private investment within specific properties that are typically underserved and in need of investment. These federal tax incentives can spur further economic development in the form of job creation and revitalization, providing new opportunities for business, housing, and retail growth.

Where are Maryland’s Opportunity Zones?

More than 8,700 Opportunity Zone areas across the country have been designated with governors in each state nominating properties that were certified by the U.S. Treasury Department last year. Out of Maryland’s 149 zones, 25 are located in Prince George’s County and 14 are in Montgomery County. Those within Montgomery County include:

  • Montgomery College’s Germantown Campus
  • Four tracts in Gaithersburg
  • Rockville Pike between Rockville Town Center and the Twinbrook Metro Station
  • Downtown Wheaton
  • Two tracts in Downtown Silver Spring
  • Two tracts in White Oak
  • Three tracts in Long Branch along the future Purple Line

For the specific Opportunity Zone boundaries, visit the Montgomery County Economic Development Corporation website https://www.lerchearly.com.

How Do Opportunity Zones Work?

Opportunity Zones generally allow investors to defer capital gains taxes, receive a step-up in basis for capital gains reinvested, and exclude new capital gains from taxable income under certain circumstances. Investors invest in Opportunity Zones through privately managed Opportunity Funds. In order to qualify, the Opportunity Fund needs to invest more than 90% of its assets in Qualified Opportunity Zone Property that is located in an Opportunity Zone.

An investor who realizes certain capital gain income may reinvest the capital gain in an Opportunity Fund within 180 days. Investors may defer paying taxes by investing in a qualified fund and receive increasing discounts on any capital gains taxes due on that money. If they leave their investment in the Opportunity Fund for at least five years, investors can reduce their capital gains tax exposure by up to 10%. After seven years, it is 15%. If they leave their investment in the Opportunity Fund for more than 10 years, any new gains are free of capital gains taxes.

Deferred taxes on invested capital gains are due by 2026. Thus, an investor will need to invest in an Opportunity Fund by the end of 2019 in order to meet the seven-year holding period and be able to exclude 15% of the deferred capital gain. An investor may exclude 10% of the deferred capital gain by investing in an Opportunity Fund by the end of 2021 in order to meet the five-year holding period.

Experts estimate that unrealized capital gains eligible to be deployed into Opportunity Zones nationwide could exceed $6 trillion. The Opportunity Zone program benefits are not exclusive and can overlap with other incentive programs such as Maryland’s Arts & Entertainment Districts and Enterprise zones. Stay tuned for further clarification from the Treasury Department that should provide guidance regarding compliance with the Opportunity Zone program.

Stuart Barr is a land use attorney who helps developers, property owners, and institutional clients secure real estate development approvals in Maryland and Washington, DC. For more information on Opportunity Zones, contact him at 301-961-6095 or [email protected].