Federal opportunity zones offer tax incentives for investment
Accountant briefs Rome business leaders on one aspect of tax reform.
A new federally designated opportunity zone, part of the Tax Cuts and Jobs Act, offers significant tax benefits for investment in downtown Rome.
Ken White, a Chattanooga accountant, told the Rome Floyd Chamber Economic Development committee he thinks the opportunity zone provisions are among the best aspects of the law pushed through by the Trump administration.
Local investors can use the law for job creation as well as real estate investments, Chamber President Al Hodge told committee members.
“Rome is already poised to take advantage of this,” White said.
Once provisions are fully understood by accountants and investors, he said it could potentially entice even more investment in downtown Rome, offering both deferred and completely free tax advantages
The federally designated zones stretch from a point just south of Darlington Drive off U.S. 27 south through downtown, between the rivers and up U.S. 27 north to John Davenport Drive and all the way out the north side of Shorter Avenue to Sycamore Street.
The area encompasses census tracts identified by the federal government as low-income or disadvantaged census tracts.
“This is all about growing and creating jobs and pulling people out of poverty and that was Congress’s intent,” White said.
The law applies to the acquisition of new properties in 2018.
“It can be existing property, older property like the Georgia Power building,” White said.
Investors put funds, typically both short and long term capital gains, in a qualified opportunity zone investment fund. Funds have to be invested within 180 days of taking a capital gain transaction, but can hold funds for up to 30 months as long as the partnership files a bona fide written reinvestment plan.
“This is good for selling stock, it’s good for diversifying, rebalancing your portfolio without paying tax on the gain,” White said.
A qualified opportunity zone fund could be a new corporation or a new partnership created strictly for the purpose of investing in an opportunity zone. A group of local investors could come together to create a fund but White said a single member LLC would not qualify.
“The fund itself, 90 percent has to be invested in the opportunity zone,” White said.
The law does not allow benefits for the acquisition of so-called “sin businesses.”
“Golf course, country clubs, massage parlors, hot tub facilities, sun tan facilities, a race track facility and liquor stores,” White said. “Bars do qualify because liquor consumption on site is fine. If you purchase liquor for off-site consumption that doesn’t qualify.”
Substantial improvements to property is also part of the bill — the fund can’t just buy a building. The accountant used the Georgia Power building at Broad Street and Turner McCall Boulevard as an example. If a fund were to buy the building, it would have to spend as much as it paid to buy the building, to repurpose the building for residential or some other commercial use.
The fund has 30 months to accomplish the remodeling.
On the other hand, a fund could go out and buy a new building in the opportunity zone which has never been used before and the fund would not have to spend any money to remodel it. Raw land could be acquired and the fund could put a hut up to do business out of and qualify.
If an investment is held for five years taxes are not paid on the year the capital gain is made.
“After five years you only pay tax on 90 percent of the gain. It’s tax deferred, if I hold it seven years, then I only pay tax on 85 percent of the gain,” White said.
Appreciation on the investment, if held for ten years, comes with no tax whatsoever on the gain. He said if he invested $200,000 into the Georgia Power building, and it sold 10 years later for $400,000, he wouldn’t pay any tax on the additional value of the building. He would pay 85 percent on the original $200,000 investment. If it sold for $1.2 million, he would not pay taxes on the million dollar increase in value.
Rome neurosurgeon Dr. John Cowan asked White if there was any risk in making the investments because of potential changes in the law.
“It’s always a risk,” White said. “But Congress wants to create economic development.”
Diagram of the federally designated Opportunity Zone that can result in tax benefits for investors in Rome.
CPA Ken White briefs business leaders on the tax advantages of federal opportunity zones in Rome during a Chamber Economic Development committee meeting Friday.