Opportunity Zone Funds:

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​An Opportunity Zone is a designation created by the Tax Cuts and Jobs Act of 2017 allowing for certain investments in lower income areas to have tax advantages. The purpose of this program is to put capital to work that would otherwise be locked up due to the asset holder's unwillingness to trigger a capital gains tax.  States may designate up to 25% of low-income census tracts as opportunity zones. The first opportunity zones were designated in April 2018.  There are more than 8,764 zones in the 50 states, and five U.S. possessions, including American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the Virgin Islands.
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Under the new tax incentive program, an investor sells an asset and generates a capital gain. The capital gains from that investment must be reinvested within 180 days into a designated Opportunity Zone (OZ). An OZ is a specially designated census tract. Large parts of the U.S. are eligible for designation, including many commercial, industrial and residential areas.
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If the investment is held, the capital gains liability on the original investment will be reduced by 10% after five years and by 15% after seven years. After 10 years, the new capital gains taxes generated from the opportunity fund investment are reduced to zero.

Summary:

• Investors may reinvest capital gains from existing investments into an opportunity fund and defer/reduce capital gains taxes.
• If held, the original investment's tax basis increases by 10% after five years and by 15% after seven years.
• After 10 years, investors permanently eliminate capital gains tax opportunity fund investment capital gains.

An Opportunity Business is any business in which:
1. Substantially all the tangible property owned or leased by the business has been purchased after 2017 and            
2. Substantially all the use of that property is located in an opportunity zone.
3. At least 50% of the total gross income of the business must be derived from the active conduct of the business, a substantial portion of the intangible property of the business must be used in the active conduct of the business, and only a small portion of the business's property can be financial instruments.

Regardless of these factors, in no circumstances can an opportunity business operate certain designated types of business (e.g., gambling facilities, racetracks, and massage parlors).

Taxpayers who invest gains in an opportunity fund (through the purchase of an ownership interest in the opportunity fund) enjoy the following tax benefits:
1. Deferral: Tax on the gain invested in the opportunity fund is deferred until the earlier of (i) the date that a taxpayer sells its interest in the opportunity fund or (ii) December 31, 2026.
2. Gain Reduction: If a taxpayer holds its ownership interest in the opportunity fund for at least five (5) years, then 10% of the gain invested in the opportunity fund is excluded from the tax owed by the taxpayer upon the sale of the taxpayer's ownership interest in the opportunity fund; if the ownership interest is held for at least seven (7) years, then an additional 5% (for a total of 15%) of the invested gain is excluded from the tax owed by the taxpayer upon the sale of the taxpayer's ownership interest in the opportunity fund.
3. Appreciation Exclusion: If a taxpayer holds its ownership interest in an Opportunity Fund for at least 10 years, then all appreciation in the investment will be tax-free when the taxpayer sells its interest in the Opportunity Fund.
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To qualify for tax benefits under the opportunity zone legislation, an investor must invest capital gains in an opportunity fund within 180 days from the date the capital gains are realized. The opportunity fund then has six months to invest in a business located in an opportunity zone or purchase property used in an opportunity zone. Thereafter, the opportunity fund must hold at least 90% of its assets in QOZP.

Becoming A Fund:

A ​Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an opportunity zone and that utilizes the investor's gains from a prior investment for funding the opportunity fund.
To become a Qualified Opportunity Fund, an eligible taxpayer self certifies. (Thus, no approval or action by the IRS is required.) To self-certify, a taxpayer merely completes a form (which will be released in the summer of 2018) and attaches that form to the taxpayer's federal income tax return for the taxable year. (The return must be filed timely, taking extensions into account.)

​For a census tract to qualify as an opportunity zone, it must have a poverty rate of 20% or higher or a median household income that is less than 80% of the surrounding area. Governors can designate 25% of their states' eligible tracts as 0-zones. In all, about 8,700 areas, ranging from rusty industrial towns to dusty rural hamlets, have been approved.
The 2017 DCI finds that 52.3 million Americans live in economically distressed communities—the one-fifth of zip codes that score worst on the DCI. That represents one in six Americans, or 17 percent of the U.S. population.
The average state has 15.2 percent of its population in a distressed community, but more than half of the Americans living in distressed communities reside in the South (compared to only 37.5 percent of the total population).

Critiques of the Program:

​Cato Institute (Conservative Think Tank)
Lawyers, accountants, and financial advisors will make money advising investors and developers on program rules, who will then make money deferring and reducing their capital gains taxes.
There is nothing wrong with cutting taxes, but opportunity zones are the wrong way to accomplish that. And national policy should not play favorites or pretend Congress or even state governors know where businesses or people should locate. (Hint: the best place for business and poor people to locate probably are not declining areas.)

Brookings Institute (Liberal Think Tank)
In an optimistic scenario, the tax benefits might encourage purchasing and rehabilitating residential property or expanding local businesses. But the value of the tax subsidy is ultimately dependent on rising property values, rising rents, and higher business profitability. That means a state's Opportunity Zones could also serve as a subsidy for displacing residents in favor of higher-income professionals and the businesses that cater to them—a subsidy for gentrification. Indeed, the highest returns to investors, and thus the largest tax subsidies will flow to those investing in the fastest gentrifying areas. Most major metropolitan areas are already grappling with the right balance between promoting development and helping existing residents. Opportunity Zones favor one side of that balance. With few guardrails that might promote so-called "smart gentrification"—policies to retain residents and preserve or expand low-and middle-income housing—it is uncertain whether poor residents will benefit or be kicked out.