At last month’s Realtor leadership conference in Washington, D.C., new information started to roll out about the initial effects of a component of the recent Tax Cuts and Jobs Act that are known as "opportunity zones." The idea behind the them is to spur investment in economically disadvantaged areas around the country. In the investment world, it’s common sense that money follows money. By and large, people only invest in areas that have proven success. The big question is how do you encourage investment in economically distressed areas? This question was presented to a diverse coalition of business leaders, policy makers, economic experts, and members of the National Association of Realtors. The innovative opportunity zone (OZ) solution was adopted with bipartisan support and included in the Tax Cuts and Jobs Act (TCJA) that was signed into law at the end of 2017.
Basically, it follows the principle that the only other way to direct money is through tax policy. If you think of the idea behind 401(K) plans, for instance, a taxpayer can shelter earnings from income tax by investing in the stock market. That one policy caused millions of individuals to invest their money in the stock market. Now individuals and corporations can shelter capital gains from taxation by investing in an opportunity zone.
OZs are not randomly determined but are defined as economically distressed areas according to the census tract. Municipalities have already identified their distressed areas and sent proposals to their respective governors for approval. Governors nominated those areas to the Department of the Treasury for official designation. Once designated as an OZ, that area is available for investment with tax-shielding benefits. Independent research from the Urban Institute concluded that the designated areas had lower income, higher poverty rates, and higher unemployment rates than eligible non-designated tracts.
Individuals and corporations who want to invest in an OZ use IRS Form 8896 to create a qualified opportunity fund. Unlike the 401(K) that restricts the amount of money you can invest, there are no limits to how much capital gain can be invested in an opportunity zone, so potentially billions of dollars can be invested in economically distressed areas. Large corporations like Microsoft, Google, and Amazon are known to keep billions of dollars outside the United States to prevent that money from being taxed. Now there is a mechanism for that money to be invested back into this country and in areas that need it the most. It’s not just for the big corporations, as anyone can invest in an OZ and if you keep your investment in that fund for at least 10 years, you eliminate your capital gains tax liability. There is a schedule in place for capital gains tax rates if investments are removed prior than 10 years.
Speaking at our conference were many economic and real estate leaders and policy makers, including President Donald Trump. One of the most moving speakers, Memphis-area Realtor Bob Turner, spoke about personally witnessing the turnaround from years of economic decline in his hometown of Memphis and in nearby Millington, Tennessee, which has seen over 40 million dollars of economic benefit in opportunity zones. Speaking about the economic improvement to those communities and the positive effects on the lives of the local residents had Bob fighting back tears.
All 50 states, four territories, and Washington, D.C., now have designated zones. Santa Fe was eligible for seven census tracts but only five were designated. Two census tracts north and south of St. Michael's Drive have the OZ designation. We think of this area as the St. Mike's Corridor or Midtown Linc but they are two distinct OZ’s. The Hopewell-Mann Neighborhood north of St. Mikes and south of Cerrillos is known as census tract 10.02. Census tract 11.03 is the area south of St. Mike's to Siringo Road and west to Camino Carlos Rey, including the old College of Santa Fe campus. The other three OZ’s include census tract 12.02, the Siler Road and Rufina corridors; census tract 13.02, the Airport Road district; and census tract 13.04, the Mutt Nelson or frontage road area.
The intention behind the OZ provision is simply to do as the name implies: create opportunity. Some of the initial stories coming out sound good but the question remains as to how much improvement will be seen. Thirty million people live within opportunity zones and millions more within a mile or so. Impact accountability is not mandated from the government, so it’s anyone’s guess as to the actual benefits to lower-income residents. For most of us who have been around awhile, we know the truth behind the saying, “The road to hell is paved with good intentions,” so these opportunity zones may not turn out the way we want.
Local leaders, neighborhood associations, and all stakeholders need to really work together because what we do with this opportunity ultimately rests entirely on our shoulders. The best measure of economic impact will be in future census data, as that will show how these areas have changed over time. Potentially it can benefit everyone, from a real-estate megafund investor to a couple of college kids opening a coffee shop.
We are excited about the benefits that can come out of this legislation. Not since the opening of the Santa Fe Trail in 1822 has Santa Fe been afforded such a tremendous economic opportunity so let’s turn it into something great.
Roger and Melissa are longtime Realtors serving both buyers and sellers. Melissa is a Past President of the Santa Fe Association of Realtors and Roger is currently serving as the First Vice President. They can be reached at 505-699-3112 or firstname.lastname@example.org or visit them online at carsonandcarson.com