New Tax Law Provisions Encourage Investments In Low-Income Communities

by McCarter & English, LLP

McCarter & English, LLP

New tax incentives for investments in low-income communities were created under the recent federal tax legislation, Public Law 115-97 (the "Act"), signed into law on December 22, 2017. Investors selling any property may elect to defer capital gain taxes otherwise payable arising from the sale of such property so long as they invest the amount of any gain in a "qualified opportunity fund" within 180 days after the sale. Furthermore, if such an investor holds its investment in a qualified opportunity fund over an extended period, the Act is intended to allow the investor to (i) reduce and possibly eliminate the previously deferred tax and (ii) potentially eliminate tax on post-acquisition appreciation in value of the qualified opportunity fund investment.

A lot of things need to happen before these tax incentives become available. The Act provides for a process whereby state governors may nominate up to 25% of the low-income community census tracts in their respective states as "qualified opportunity zones" (except that if a state has fewer than 100 low-income communities, then up to 25 of such tracts may be nominated as qualified opportunity zones). Those nominations are required to be made in writing to the Secretary of the Treasury within 90 days following the date of enactment of the Act (i.e., no later than March 22, 2018) and take into account factors described in the legislative history. The Act does provide that a state governor may request a 30-day extension for those nominations. The Act further provides that the Secretary of the Treasury shall prescribe regulations necessary or appropriate to carry out the purposes of the new rules, including rules for the certification of qualified opportunity funds and rules to prevent abuse.

The Act defines a qualified opportunity fund as any "investment vehicle" that is a corporation or a partnership (including, presumably, a limited liability company) organized for the purpose of investing in "qualified opportunity zone property" and that holds at least 90% of its assets in qualified opportunity zone property at the required times. The qualified opportunity zone property held by the investment vehicle can be either (i) an equity interest (i.e., not debt) in another corporation or partnership in which substantially all of the tangible property owned or leased by such entity consists of "qualified opportunity zone business property" and various other criteria are met, or (ii) a direct interest in qualified opportunity zone business property. The corporation or partnership in which the investment vehicle acquires an equity interest must be engaged in a "qualified opportunity zone business."  In addition, unless the applicable qualified opportunity zone business property is "new" property whose original use commences with the owner entity, any amounts invested in "used" qualified opportunity zone business property must be "substantially improved" during a 30-month period beginning after the property is acquired.

If the gain from a sale of property is invested and held in a qualified opportunity fund, then in addition to deferring the payment of taxes based on such gain, the Act is intended to allow an investor to permanently reduce or possibly eliminate the deferred tax liability by receiving certain increases in its tax basis in the fund (which is initially deemed to be zero). Specifically, the investor’s basis in the fund is increased by 10% of the deferred gain if it holds its investment in the fund for more than five years. Another increase in basis equal to 5% of the deferred gain can be obtained by holding the investment in the qualified opportunity fund for two more years (for a total of seven); and if the investor continues to hold its investment in the fund until at least December 31, 2026, although the statutory language is not entirely clear, the legislative history indicates that the investor’s basis is increased by the remaining 85% portion of the deferred gain. A further incentive provision applies if the qualified opportunity zone investment is held for more than 10 years – in which case the Act is intended to eliminate tax on post-acquisition appreciation in value (through the mechanism of an elective step-up in basis to fair market value on the date of sale).

In the short run, communities that want to take advantage of the benefit of these tax incentives will need to be sure that the governor of their state nominates them as a "qualified opportunity zone" by the required deadline. Organizations that want to facilitate investments in qualified opportunity funds may want to participate in the process of formulating the Treasury Department regulations, which will define the requirements for the qualified opportunity funds. Once the regulations have been issued, organizations that want to sponsor such funds will need to work with experienced legal counsel in establishing such funds and investing the capital they raise so as to maximize the benefits to their investors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McCarter & English, LLP | Attorney Advertising

Written by:

McCarter & English, LLP

McCarter & English, LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.