Federal tax break could bring investors to poor towns

Recorder Staff
Wednesday, March 07, 2018

The $1.5 trillion federal tax cut enacted last year includes a tax incentive that might bring investors to parts of America — and Franklin County — that need investment and economic recovery.

The new Opportunity Zone Program allows state governors to create “Opportunity Zones” in which investments can be made in distressed communities, and any capital gains taxes can be deferred for up to eight years. The goal is to stimulate investment in low-income communities and revitalize the economy.

According to Linda Dunlavy, executive director of the Franklin Regional Council of Governments, Massachusetts has about 547 low-income community census tracts, and Gov. Charlie Baker may designate up to 25 percent of these qualifying regions as Opportunity Zones, under the rules.

Speaking to Colrain selectmen this week, Dunlavy said Baker has announced plans to designate about 138 low-income Opportunity Zones, and that he intends for about 10 percent of those zones to be rural areas with populations of less than 10,000 people. One rural area to qualify would be: a combined census tract of Colrain, Charlemont, Hawley, Heath, Rowe and Monroe. Another combined Opportunity Zone could be Erving, Warwick and Wendell.

Dunlavy said Greenfield, Montague and Orange also have eligible census tracts for this program.

To be eligible, communities must submit applications by March 22 to the U.S. Department of the Treasury for review and approval. At least 95 percent of the tracts submitted must be considered low-income, with the remaining tracts adjacent to low-income areas, with a relatively low median family income.

In addition to financial eligibility, Opportunity Zones should have projects that would attract investors, Dunlavy said. She suggested such projects as a brownfield clean-up or redevelopment of a property. Selectboard members suggested the town’s high-speed broadband network or the need for a sewer system in the town center, to stimulate new growth and commercial activity.

Colrain Selectboard Chairman Mark Thibodeau said the town once had five dams that provided hydro-electricity. He said he would like to see the town produce more of its own power.

Dunlavy said not all towns in a combined Opportunity Zone are likely to find investors for their projects.

“If we don’t have anything, and it’s going to help another town? It’s still going to spill over to us, somehow,” he said, of the economic benefits to the area.

So far, selectboards in Charlemont and Colrain have agreed to be part of an application to become a combined Opportunity Zone with other rural towns. Dunlavy said she will work with Colrain Town Coordinator Kevin Fox before submitting an application on behalf of the towns.

Kevin Hassett, an economist and chairman of President Donald Trump’s Council of Economic Advisers, told the New York Times last month that his interest in the Opportunity Zones stems from growing up near Turners Falls, which has struggled since the closing of its paper mills. Hassett grew up in Greenfield.

“If it’s successful, we’ll look back 10 years from now and say this was one of the most important parts of the tax bill — and one we didn’t talk nearly enough about,” he said in the New York Times.

How it works

Investors can invest capital gains into the Opportunity Zones and both defer and reduce the federal tax liability for those capital gains. These investments would be made through privately created “Opportunity Funds.”

The program will have no effect on state tax policy.

Any capital gains taxes owed on investments in an Opportunity Fund are deferred for up to eight years. When capital gains taxes are paid, the investor pays taxes on the lesser of the original Opportunity Zone investment, or the fair market value of the investment at the time of claim. This way, if the investor sees a loss, it reduces the amount of capital gains taxed.

If the investment stays in the Opportunity Fund for five years, federal capital gains taxes owed on the original investment are reduced by 10 percent. If it stays in for seven years, federal capital gains taxes are reduced by another 5 percent.

If the investment stays in the Opportunity Fund for 10 years, any profits from the investments do not incur capital gains taxes.

After receiving the applications, the Treasury will have 30 days to review proposed Opportunity Zone designations. After Treasury approval, Opportunity Zones will remain in place for 10 years.

Opportunity funds can be invested in businesses, partnerships or business properties, subject to IRS restrictions. Also, Opportunity Funds cannot make qualified investments into property that was owned by the controller of the fund before Dec. 31, 2017.