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Econ Focus

First Quarter 2019

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Opportunity Zones: The Nitty Gritty

Governors designated their state or territory's opportunity zones last year from among a pool of low-income high-poverty census tracts, with input from other state and local leaders. To be eligible, a census tract had to have either a poverty rate above 20 percent or a median household income no greater than 80 percent of the median for the state or broader metropolitan area. Up to 25 percent of the eligible tracts could be designated, using whatever criteria officials deemed appropriate. In Norfolk, for example, in addition to need, the mayor considered criteria such as proximity to institutions and access to transportation. Governors could also designate a small number of ineligible tracts that were contiguous with low-income tracts, provided the median household income wasn't more than 125 percent of the median in the adjacent qualifying tract. All designations were subject to certification by the Treasury secretary.

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Opportunity Zones in Distressed Communities

The promise and pitfalls of a new financing model for distressed communities

Investors can defer the tax on any prior gains they invest in a qualified opportunity fund (QOF) until the investment is sold or exchanged, or until Dec. 31, 2026, whichever comes first. If the QOF investment is held for longer than five years, the investor can exclude 10 percent of the deferred gain from taxation. If the investment is held for more than seven years, the investor can exclude 15 percent -- which means those who want to exclude the maximum amount need to get started by the end of 2019. Also, investors who hold their QOF investment for at least 10 years do not have to pay taxes on any gains on the amount they invested in the QOF, although they would still have to pay taxes on the original deferred amount, less any exclusion, by Dec. 31, 2026.

In addition to investing in real estate, QOFs may also purchase stock or take a partnership interest in new or existing businesses in opportunity zones. But not all businesses are eligible; the rules specifically exclude golf courses, tanning salons, massage parlors, race tracks, and liquor stores, among others.

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