Investing in “opportunity zones”

Last year’s tax overhaul created a major new incentive for investing in some of the United States’ poorest neighborhoods. The brand new “opportunity zones” enable private investors to re-invest their profits into businesses that are located in parts of the country that are generally starved from outside investment. John Lettieri, co-founder and president of the Economic Innovation Group in Washington, DC, helped to design this new tax incentive and explained how it will likely work. What is an opportunity zone? It’s a low-income community that gets selected by a state’s governor for this new federal tax incentive. Governors can choose up to a quarter of their states’ low-income census tracts for opportunity zones. We’re still waiting for the last four states to have their tracts approved by the U.S. Treasury Department. But when all is said and done, roughly 8,700 census tracts — about 11 percent of all census tracts — will be designated as opportunity zones. How does this tax break work? Basically, capital gains from other investments can be used to invest in these opportunity zones. Over time, the investors get preferable treatment on the profits from these new investments. If the opportunity zone investment is held for 10 years, the capital gains are tax free. Most of the zones have been approved by Treasury. What are the next steps? Treasury and the IRS have to release guidance to create opportunity funds for raising and deploying capital into these communities. We should expect some clarity on this guidance in the third quarter of this year. There is nothing guaranteed about opportunity zone. Just because you have a designated census tract, it doesn’t mean the capital is going to automatically flow there. How are funds set up? This is going to be mostly private sector led in terms of the creation of funds. There is no cap on the amount of dollars that can go through opportunity zones. Are any types of investments forbidden? One is the “sin list,” such as casinos, golf courses and massage parlors. Another carveout is for financial companies that invest and lend as their core business. What does this mean for small businesses? One of the most important trends we see nationwide is concentration of capital in a few areas. About 80 percent of venture capital goes to California, Massachusetts and New York. Through opportunity funds, this will have the opposite incentive to encourage people to start and scale their businesses locally. There was $6.1 trillion in unrealized capital gains as of the end of 2017. Even if a fraction of it gets invested in low income communities, it’s a sea change. Interviewed by Joshua Boak. Answers edited for clarity and length.