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Opportunity Zones: Does the money flow through your city?

“Opportunity Zones” have stolen headlines in Maine recently – while the topic seems geared to investors, this could be a big opportunity for your town too.

What is an Opportunity Zone? In 2018, governors in all 50 states identified areas that are ripe for investment or improvement – most of which are under-capitalized or low income. In these zones, the Tax Cuts and Jobs Act incentivizes investors to focus on these zones by offering a tax break. The goal is to improve these zones and strengthen the economy. So how does it work? In 8,700 zones across the U.S. and 32 cities or towns in Maine, investors are incentivized to re-invest unrealized capital gain earnings (profits they’d typically pay a large tax on) into projects in opportunity zones without paying tax on those profits. The general idea: investors lift communities that that need improvement and realize a tax benefit for doing it. In these zones, funds can finance commercial and industrial real estate, housing, infrastructure, and existing or start-up businesses. For real estate projects to qualify for specialized financing, the investment must result in the properties being “substantially improved.” The program provides three tax benefits for investing unrealized capital gains in Opportunity Zones:

  • Temporary deferral of taxes on previously earned capital gains. Investors can place existing assets with accumulated capital gains into Opportunity Funds. Those existing capital gains are not taxed until the end of 2026 or when the asset is disposed of.
  • Basis step-up of previously earned capital gains invested. For capital gains placed in Opportunity Funds for at least 5 years, investors’ basis on the original investment increases by 10 percent. If invested for at least 7 years, investors’ basis on the original investment increases by 15 percent.
  • Permanent exclusion of taxable income on new gains. For investments held for at least 10 years, investors pay no taxes on any capital gains produced through their investment in Opportunity Funds.

In our view, this has been a great tool to strengthen our economy and improve our local communities. If you have questions on how to leverage your position, we are here for you.

For the full list of all 32 Opportunity Zones in Maine, visit: https://www.maine.gov/decd/sites/maine.gov.decd/files/inline-files/Opportunity-Zone-List.pdf