Tuesday, June 28, 2022

Leland discovers it’s one of IRS’s new economic ‘Opportunity Zones’ for capital-gains relief

Leland recently figured out a large northern portion of its town limits falls in a federally-designated Opportunity Zone. The zones provide capital gains deferral and elimination options for investors. And 2019 is a critical year to maximize capital gains relief.

All of Navassa's town limits, northern portions of Leland's town limits, and northern unincorporated Brunswick County (shown in green) fall in a U.S. Census tract that qualifies as an Opportunity Zone (OZ). A large portion of central Brunswick County north of U.S. 17 (shown in blue) is also an OZ. (Port City Daily photo/Courtesy Department of the Treasury)
All of Navassa’s town limits, northern portions of Leland’s town limits, and northern unincorporated Brunswick County (shown in green) fall in a U.S. Census tract that qualifies as an Opportunity Zone (OZ). A large portion of central Brunswick County north of U.S. 17 (shown in blue) is also an OZ. (Port City Daily photo/Courtesy Department of the Treasury)

LELAND — A relatively unknown tax-incentive program is available to investors in the Leland area that allows complete relief from capital gains after a 10-year period.

Rolled out in December 2017 under the Trump administration’s Tax Cuts and Jobs Act, Opportunity Zones were assigned last April. Though Leland didn’t apply to be counted as one, the northern part of the town is eligible.

Related: Leland wants an extra-territorial district that would double the area it controls

By the year’s end, the fullest extent of tax relief in Opportunity Zones will expire. However, capital gains deductions will still remain available.

OZs

Gary Vidmar, Leland’s economic development and community development director, does not know how the town got included as one of the state’s 252 Opportunity Zones (OZ).

“To my knowledge, no one here in Leland was a part of the application process,” Vidmar said at the town’s Economic Development Committee meeting Thursday. “Surprisingly, I’ve talked to a few banks — BB&T included — they’re not even aware of this program.”

Here’s how it works: Typically, individuals owe capital gains — taxes on profits from investments — at a rate based on income thresholds. With OZs, investors can instead re-invest their profits in businesses and real estate in economically distressed areas. Over time, investors can defer their tax liability on their initial capital gains.

Relief is available in tiers; after holding an OZ investment for five years, 10 percent of the capital gains liability is deferred; at seven years, an additional five percent is deferred.

“However, the gold is at the end,” Vidmar said Thursday. If a property or business is held onto for at least 10 years, the capital gains on the new investment would have zero tax liability.

“So you’re deferring taxes on the capital gain investment, but you’re eliminating taxes on the future capital gain that you become responsible for upon sale of that future real estate or business,” Vidmar said. “That’s the home run.”

Eligible projects

All of Navassa, “old” Leland north of U.S. 74, and a large swath of central Brunswick County north of Highway 17 are federally-designated OZs.

The Internal Revenue Service program is designed as an economic development tool to encourage growth and job creation in low-income areas. Investors have 180 days to set up a Qualified Opportunity Fund (QOF) that will hold profits that would otherwise be subject to capital gains taxes. Vidmar said OZs are more advantageous than Section 1031 of the Internal Revenue Code, which allows deferred taxes via like-kind investment exchanges.

Of the funds set up in the QOF, 90 percent must be invested in the OZ property.

Investors are given 30 months to spend 50 percent of the total upgrade cost on an OZ property. Once 50 percent of the upgrade cost is reached, no time limit is in place for finishing improvements.

Because of how new the program is, Vidmar said, the Internal Revenue Service (IRS) is still fielding questions. For example, the tax code isn’t clear on land investments in OZs.

“So the question becomes, what is the rule for using that capital gain? Is it limitless? Is there no end to the period of time?” Vidmar asked.

Economic Development Committee member, Michael Braddock, said some aspects of the OZ program remain unclear. “There are a lot of open-ended questions with regard to some of these programs.”

Vidmar said he is hoping some of this uncertainty could lead to an extension of the program beyond 2026. The IRS is expected to address some of the code’s ambiguities in the coming months, he said.

“Obviously, we’re small peanuts, but there’s still tremendous opportunity,” Vidmar said. “As we talk to developers, even the local developers as we begin learning about this, are all over it.”

It’s been less than one month since Leland realized its OZ potential. The discovery in the real estate community, Vidmar said, is already triggering price hikes in the area.

“Prices of land are beginning to go up, pretty significantly,” he said. “There’s one particular parcel of land on South Navassa Road that’s priced out of sight.”

Read more about Opportunity Zones in the Internal Revenue Service’s FAQ page.


Send tips and comments to Johanna Ferebee at johanna@localvoicemedia.com

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