As part of the 2017 Tax Cuts and Jobs Act, Opportunity Zones were created as a method of developing economies in disadvantaged communities. Within Opportunity Zones, shareholders can invest in real estate. Long-term investments result in federal tax benefits. Opportunity Zone investments are not yet fully implemented, due to an ongoing effort by the Treasury Department and the Internal Revenue Service to clarify the fine details. However, it is vital that potential investors understand how Opportunity Zones function. This will allow investors not only to arrange necessary paperwork and funding, but also it will allow disadvantaged communities to prepare to accept new investments.
What are Opportunity Zones?
Opportunity Zones are neighborhoods that have been designated as requiring economic revitalization. Economic development within New Jersey’s Opportunity Zones is achieved by driving long-term investments into these communities. Opportunity Zones benefit investors in the form of unique tax benefits. Opportunity Zone federal tax benefits occur through deferment. The longer an investment is held, the more potential benefits an investor may receive. As shareholders invest in Opportunity Zone real estate projects, economic growth will be encouraged: commercial and residential properties that receive investments can update their amenities and appearances. In turn, this creates a more desirable neighborhood, and it can improve the value of the property. New Jersey’s Opportunity Zones are numerous and diverse, and they offer sound investment opportunities to enterprising taxpayers.
Where are New Jersey’s Opportunity Zones Located?
Federal legislation dictated that eligible Opportunity Zones would be formed using pre-existing census tracts. A census tract is a neighborhood pre-determined by the Bureau of Census. Census tracts are designated based on important economic factors, including an area’s unemployment rate and average income. Because census tracts readily identify economically disadvantaged communities, the decision to use them to create Opportunity Zones sped up the process of enacting the tax legislation. Opportunity Zones are located in both urban and rural areas, making this a revitalization project that does not discriminate based on location.
Across eighteen states and territories, the Treasury Department has identified 8,700 Opportunity Zones. Only up to 25% of New Jersey’s low-income neighborhoods could be designated as Opportunity Zones, per the federal mandate. Gov. Murphey nominated the maximum number of census tracts – 169 – each of which was approved by the Treasury Department. Therefore, New Jersey has 169 Opportunity Zones, representing 75 municipalities across every county in the state. The New Jersey Department of Community Affairs created a Community Asset Map, a virtual mapping tool that allows user to view all Opportunity Zones within the state. This map provides not only a visual representation of all available New Jersey Opportunity Zones, but also it provides census data on each Zone. At the end of this article, there is a full list of all New Jersey Opportunity Zones organized by municipality.
What are Opportunity Funds?
One cannot directly invest in an Opportunity Zone; rather, one must invest into an Opportunity Zone through an Opportunity Fund. An Opportunity Fund is a private investment vehicle that allows shareholders to invest in eligible property located in Opportunity Zones. Opportunity Funds can be established either as corporations or as partnerships. Opportunity Zone tax breaks come in the form of exclusion from parts of the capital gains tax. Taxable gains can originate from a variety of investments, including real estate, bonds, and stocks. Opportunity Funds can be used to invest in a variety of real estate as well, from commercial businesses to residential complexes. However, the property must have been acquired after January 1st, 2018.
Opportunity Funds are designed to encourage holding investments for the long-term, with capital gains tax rewards scaling depending on how long an investor leaves their investment in an Opportunity Fund. Re-investing capital gains into an Opportunity Fund allows a shareholder to defer paying capital gains taxes on the realized gains until no later than December 31st, 2026. If Opportunity Fund assets are sold after five years, then 10% of an investor’s deferred gain can be reduced from their tax bill. If assets are sold after seven years, then the tax reduction increases to 15%. If an Opportunity Fund investment is held for at least ten years, then the investor will be fully excluded from paying any capital gains taxes on gains realized from their investment.
The capital gains tax functions very differently for Opportunity Zones compared to other forms of tax deferment (for example, like-kind exchanges). A shareholder does not need to reinvest all proceeds from the sale of assets; rather, they only need to reinvest proceeds from gains. Additionally, unlike other tax codes, Opportunity Zones do not require a minimum or maximum investment. Therefore, investing in Opportunity Zones is approachable for enterprising taxpayers of all income levels.
Opportunity Funds cannot, however, defer capital gains taxes indefinitely. Deferred gains must be recognized before December 31st, 2026, or when the assets are exchanged or sold – whichever date occurs first. After December 2026, Congress must decide on whether or not they wish to reauthorize the Opportunity Zone program. In summary, there are four main benefits to investing in New Jersey’s Opportunity Zones. Capital gains taxes can be deferred until up to 2026; capital gains taxes can be reduced depending on how long Opportunity Fund assets are held; investments held over ten years are fully excluded from taxes on future gains; and, there are no requirements that determine one’s minimum or maximum investment. While there are not as many limits on Opportunity Zones as there are on other capital gains tax benefits, there are still some requirements that investors must adhere to.
What are the Requirements to Form an Opportunity Fund?
There are some factors that must be considered before investing in an Opportunity Fund. First, at least 90% of Opportunity Fund assets must be held in Opportunity Zone properties. This can include tangible property or stock used in real estate or businesses. It is important to note that Opportunity Funds do not consider intangible property a viable asset; therefore, businesses that operate largely online may not benefit as much from Opportunity Zone tax benefits. The second factor that allows an Opportunity Fund to be properly recognized is that the Fund must be organized with the intended purpose of investing in properties found in Opportunity Zones. Finally, there are a number of guidelines and regulations that the Treasury Department and the IRS are currently outlining. These guidelines are still being drafted. Once the final regulations are set forth, following these guidelines will be vital to the successful creation of an Opportunity Fund.
Thankfully, it is not a requirement to operate a business within an Opportunity Zone in order to gain the tax benefits. It is also not a requirement to live within the boundaries of an Opportunity Zone. This means that, regardless of where in New Jersey you conduct business, you are still eligible for investing in Opportunity Zones. For example, if you are a business owner in Hackensack, you are still able to invest in an Opportunity Zone in a different county. You are required, however, to invest in an Opportunity Fund in order to properly defer the tax on your investment’s gains.
Opportunity Zones are an exciting new venture that will allow struggling communities to thrive while also providing investors with a well-designed tax break. The IRS is still providing feedback on the proposed guidelines for handling the capital gain tax, however. On January 10th, 2018, the IRS scheduled a public hearing to address comments from both community members and investors; however, due to the government shutdown that began in December 2018, the IRS had to cancel the hearing. A date for a new hearing has not been set as of this writing. Opportunity Zones are coming, though.
Analysts predict that Opportunity Zones will be fully deployed before the end of 2019. Many of New Jersey’s Opportunity Zones are located in stellar areas – the communities simply need some real estate face-lifts. The Opportunity Zones are already approved, so it is possible to begin seeking out commercial and residential real estate for potential investment. It is in the best interest of enterprising investors to make the necessary preparations for an Opportunity Fund.
Below is a list of all municipalities that contain at least one Opportunity Zone in New Jersey, organized by county:
Atlantic County: Atlantic City, Egg Harbor City, Egg Harbor Township, Pleasantville, and Somers Point
Bergen County: Cliffside Park, Englewood, Fairview, Garfield, Hackensack, Lodi, South Hackensack, and Teterboro
Burlington County: Burlington City, Palmyra, Pemberton Township, Riverside, and Willingboro
Camden County: Camden City, Lindenwold, Pennsauken, and Pine Hill
Cape May County: Wildwood, West Wildwood, and Lower Township
Cumberland County: Bridgeton, Vineland, and Millville
Essex County: East Orange, Orange, Irvington, and Newark
Gloucester County: Deptford, Glassboro, and Woodbury
Hudson County: Bayonne, Kearny, Jersey City, North Bergen, Union City, and West New York
Hunterdon County: Flemington
Mercer County: Trenton and Hamilton
Middlesex County: Carteret, Jamesburg, New Brunswick, Perth Amboy, and South River
Monmouth County: Asbury Park, Freehold Borough, Long Branch, Neptune City, Neptune Township, and Red Bank
Morris County: Dover and Wharton Borough
Ocean County: Berkeley, Lakewood, and Manchester
Passaic County: Clifton, Passaic City, Paterson, and Prospect Park
Salem County: Carney’s Point and Salem City
Somerset County: Bound Brook and North Plainfield
Sussex County: Sussex Borough
Union County: Elizabeth, Hillside, Plainfield, Linden, and Rahway
Warren County: Phillipsburg