Background
Public Law 115-97, also known as the Tax Cuts and Jobs Act of 2017, provides for the governor of each state to nominate qualified census tracts as “Opportunity Zones”. Designation as an Opportunity Zone allows for the creation of a new class of investment vehicle with tax advantages authorized to aggregate and deploy private investment located in Opportunity Zones. The purpose of these tax advantages is to direct capital investment into economically distressed areas.
Nomination
On April 19, 2018, the Governor’s office submitted 63 tracts to the Department of the Treasury to be designated as Opportunity Zones. NMEDD worked with local stakeholders via county governments to submit a detailed questionnaire on eligible tracts in their area. Local stakeholders included private enterprise, economic development organizations, business organizations, councils of government, property owners/developers, tribal entities, and community organizations among others. New Mexico had 249 eligible tracts of which 128 were submitted for consideration. In turn, New Mexico nominated to the Treasury its full allotment of 63 tracts.
Designation
On Friday, May 18, 2018, the Department of the Treasury designated 63 Opportunity Zones in New Mexico. New Mexico’s Opportunity Zones are located in rural, tribal and urban communities in 22 counties. Qualified Opportunity Zones retain this designation for 10 years.
How does it work?
The Opportunity Zones program offers three tax incentives for investing in low-income communities through a qualified Opportunity Fund*:
| Temporary Deferral | Step-Up in Basis | Permanent Exclusion |
|---|---|---|
| A temporary deferral of inclusion in taxable income for capital gains reinvested into an Opportunity Fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is disposed of or December 31, 2026. | A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation. | A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund. |
* A qualified Opportunity Fund is a privately managed investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (the vehicle must hold at least 90 percent of its assets in such property). Low-income census tracts are defined in Internal Revenue Code Section 45D (e). Qualified opportunity zone property includes any qualified opportunity zone business stock, any qualified opportunity zone partnership interest, and any qualified opportunity zone business property. Only taxpayers who roll over capital gains of non-zone assets before December 31, 2026, will be able to take advantage of the special treatment under the provision.