The Dual Impact of Opportunity Zones and ITC Credits

In 2017, as part of an effort to spur economic growth in lower-income areas, the US federal government established a number of development zones located around the country in which investors could find desirable tax incentives. They named them Opportunity Zones as a way of indicating the opportunities they provide to investors as well as to those who live and work in the communities located within the zones.

Financial experts see the incentives provided by Opportunity Zones as an opportunity that investors should not overlook.

“Opportunity Zones have emerged as one of the most powerful place-based tax incentives ever created by Congress by offering private capital investors a range of lucrative tax benefits while simultaneously revitalizing economically distressed communities,” explains Ashly Tison, Esq., founder of OZPros. “Enacted as part of the Tax Cuts and Jobs Act, these designated zones have captured the attention of investors nationwide and recent legislation has made them even more attractive.”

Tison is a leading consultant and attorney on Opportunity Zones. His organization helps investors, real estate professionals, business owners, and community stakeholders to develop Opportunity Zone strategies.

Reshaping the investment landscape

Tison points to a number of benefits that Opportunity Zones have brought to the investment landscape. The first involves the deferral and reduction of capital gains taxes.

“One of the primary incentives offered to those who invest in Opportunity Zones is the ability to defer and reduce capital gains taxes,” Tison explains. “By reinvesting capital gains into a qualified Opportunity Zone fund within 180 days, investors can defer paying taxes on those gains until December 31, 2026, or until they sell their Opportunity Zone investment — whichever comes first. This has the potential to drive greater overall returns by allowing investors to maintain more capital upfront for further investments.”

By shifting the gain to a point in the future, the deferral further allows for the implementation of creative tax planning strategies that normally could not be used post-sale. Even when transactions resulting in capital gains have already occurred, the benefit allows taxes to be postponed, giving taxpayers time to implement other tax mitigation strategies to offset the gain.

Tison says one of the most enticing benefits of Opportunity Zones is the potential they provide for tax-free gains on new investments made within the designated zones.

“If an investor holds their Opportunity Zone investment for at least 10 years, any capital gains earned from the appreciation of that investment are entirely tax-free through the process of a step-up in basis to fair market value,” Tison explains. “Savvy investors will recognize that this benefit involves not only capital gains reduction but also creates the opportunity to create tax-free income and to be able to sell the asset without having to recapture the depreciation as income. Essentially, this provision allows investors to unlock substantial wealth accumulation and maximize their returns without the requirement to pay federal capital gains taxes.”

Providing opportunities for dual impact

Opportunity Zones can also serve investors as a fulcrum for coordinating additional federal and state benefits. A number of legislative initiatives launched since Opportunity Zones appeared have provided additional incentives for projects happening within the Zones. The recently introduced Small Business Jobs Act, for example, would greatly expand the scope and power of Opportunity Zones for rural persistent poverty census tracts.

The US federal government’s solar Investment Tax Credit (ITC) is a perfect example of a federal benefit that can be combined with Opportunity Zone incentives to maximize impact. The ITC benefits those who purchase solar photovoltaic systems by reducing their federal income tax exposure. It allows filers to claim a percentage of the cost of their system on their federal taxes.

“By strategically targeting investment projects that are located within Opportunity Zones and at the same time eligible for federal ITC Credits, investors can achieve a remarkable double benefit,” explains Justin Draplin, Founder and CEO of ECLIPSE Cottages. “Not only does it supercharge the return on investment, but it also delivers a considerable positive impact for the community and the environment by simultaneously driving economic growth, job creation, community development, and environmental sustainability.”

Fortified Solar by ECLIPSE Cottages is transforming the solar-powered housing sector by delivering innovative new solutions for maximizing sustainability and affordability. Its groundbreaking solutions leverage patented M10 Solar Panel roofs, wireless smart switches, structural insulated panels (SIP), and other green technology to provide people with homes that generate more energy than they consume.

As both Tison and Draplin point out, taking advantage of incentives like those offered through Opportunity Zones and ITC has the potential to result in far more than a healthy financial return for the investor.

“Opportunity Zones have revolutionized the investment landscape by offering a range of tax benefits that attract capital to economically distressed areas,” Tison says. “Through the deferral and reduction of capital gains taxes, tax-free gains on new investments, and the preservation of basis, investors have the opportunity to maximize their returns while simultaneously revitalizing underserved communities. These tax advantages combined with the potential for long-term growth and positive social impact make Opportunity Zones an enticing avenue for investors seeking to optimize their tax position while driving meaningful change.”