The Tax Cuts and Jobs Act of 2017 contained many new tax incentives designed to spur long-term investments, especially in impoverished and distressed neighborhoods that historically had been overlooked by investors and developers.
The Opportunity Zone Program was a preferential tax program enacted to entice real estate investors to roll over capital gains from the sale of investment assets into new investments in low-income census tracts. The longer investors hold their investments, the greater the benefit. These include an adjusted basis of 10 or 15 percent if they hold for five or seven years, respectively, and an adjusted basis to fair market value if they hold for at least 10 years, which can effectively erase any accumulated capital gains from the investment asset.
Investors have inquired if any of the more than 8,700 designated census tracts are contiguous -- do they share common boundaries? Read on to learn more.
How Many QOZs Are Contiguous?
While more than 42,000 census tracts were eligible for the Opportunity Zone designation, only 8,762 were actually designated as such. These census tracts can be found in all 50 states, as well as five U.S. territories and also in Washington, D.C. The majority of these census tracts -- 97 percent -- are in low-income communities.
Among those designated census tracts, just 230 were contiguous.¹ That’s just 2.6 percent of all designated census tracts, even though there was a target of no more than 5 percent contiguous Opportunity Zone census tracts. These contiguous census tracts also are not defined as low-income Opportunity Zones.²
Here’s how state governors, who were responsible for nominated designated census tracts within their state borders, arrived at that number of contiguous census tracts. Tracts were either low income (as defined by the New Markets Tax Credit) or contiguous with a nominated tract, provided the median family income in the contiguous tract was lower than 125 percent of the adjacent low-income census tract.³
The Bottom Line
Some states have more contiguous census tracts than others. Virginia, for example, has the maximum number allowed (5 percent), for a total of 11 contiguous census tracts.⁴
There are a number of Opportunity Zone mapping tools investors can use to determine where there are contiguous tracts. Many of these tools look at the entire U.S., while states typically have their own Opportunity Zone mapping tools as well to help narrow down your search. Some states, such as Connecticut, also have Opportunity Zone concierges to help connect investors to potential investment opportunities within their states.
Sources:
1. Opportunity Zones: How Communities Were Selected for Participation, Mission Investors, https://missioninvestors.org/resources/opportunity-zones-how-communities-were-selected-participation
2. What Are Opportunity Zones, OpportunityDb, https://opportunitydb.com/guide/opportunity-zones/
3. Tax Incentives for Opportunity Zones, Congressional Research Service, https://fas.org/sgp/crs/misc/R45152.pdf
4. Virginia’s Opportunity Zone Market, https://www.opportunityva.org/
