Opportunity Zones: Seizing the Investment Opportunity in Colorado
The OZ Program has tremendous potential for promoting economic vitality across Colorado
The passage of the Tax Cuts and Jobs Act resulted in the creation of a significant new economic development tool through a federal income tax incentive known as the Opportunity Zone Program ("OZ Program"). This tax incentive regime is designed to stimulate economic development by incentivizing taxpayers to reinvest capital gains in newly formed investment vehicles called Qualified Opportunity Funds ("QOF"), which deploy capital into projects or operating businesses located within one or more of approximately 8,700 Qualified Opportunity Zones ("QOZs"). In return, an investor receives significant income tax savings through the deferral and partial reduction of taxable capital gains with repsect to proceeds that are invested in a QOF, and the subsequent elimination of taxable gain on the long-term appreciation of the investment in a QOF. Colorado has over 120 QOZs that are capable of providing significant planning opportunities for investors while generating additional long-term investment in areas most needing of redevelopment and business growth.
QUALIFIED OPPORTUNITY FUNDS
In order to participate in the OZ Program, taxpayers recognizing a capital gain from the sale or exchange of any property to an unrelated person are required to invest all or a portion of such gain in a QOF, which serves as an intermediary investment vehicle. The intermediary fund structure is intended to facilitate the pooling of capital from a broad range of investors, some of whom may otherwise lack the wherewithal to organize and manage their own.
(i) no prior approval by the IRS is required to organize a QOF,
(ii) qualifying gains can be derived from the disposition of a wide-array of assets, and
(iii) there is no cap on the amount of capital that can be invested through QOFs, the qualifying capital and investor base for the OZ Program is extremely broad.
QUALIFIED OPPORTUNITY ZONES
A QOF is required to invest its capital, directly or indirectly, in real estate or businesses located within one or more QOZs, which are census tracts that:
(i) have a poverty rate of at least 20 percent or a median family income that does not exceed 80 percent of statewide average or metropolitan area average, as applicable; and
(ii) were nominated by the respective chief executive of each U.S. state and possession.
Colorado’s 126 QOZs are spread throughout the state, including the Western Slope, Northeastern and Southeastern Colorado, areas in and around Mile High Stadium, the I-70 Corridor around the National Western Stock Show Complex, DIA, Colorado Springs, Boulder, and Broomfield. In total, these QOZs present numerous investment opportunities in both urban and rural areas of Colorado, and should provide excellent opportunities for real estate development, business relocations and expansions, startup businesses, large scale infrastructure projects and economic stimulus programs. All QOZs have been formally designated and will remain in effect through 2028.
TAX INCENTIVES TO INVESTORS
The OZ Program provides three federal income tax incentives with respect to the investment of proceeds in a QOF related to a previously generated capital gain:
- Deferral of the recognition (until Dec. 31, 2026) of income taxation on the capital gain to the extent proceeds are contributed by the investor to a QOF;
- Up to a 15 percent reduction in the amount of the capital gain to be recognized as subject to income taxation on Dec. 31, 2026; and
- If the investor holds its interest in the QOF for at least 10 years, tax free growth of the original amount of the proceeds representing capital gains invested in the QOF.
Another unique attribute of the OZ Program is its downside risk protection. Specifically, if the fair market value of an investor’s interest in a QOF has decreased:
(i) on the gain recognition date of Dec. 31, 2026, the investor is only subject to tax on the decreased value of its interest (less the investor’s basis); or
(ii) upon expiration of the ten year holding period, the investor is permitted to recognize the loss.
POTENTIAL APPLICATIONS IN COLORADO
The OZ Program has a number of potential applications for business development in Colorado, including:
- Real estate development and/or real estate rehabilitations in QOZs;
- Opening new businesses in QOZs;
- Acquiring an existing business and relocating it (with expansion) in a QOZ; and
- Expansion of existing businesses located within QOZs.
- Infrastructure projects within QOZs.
Businesses and developers may combine the tax incentives from the OZ Program with other tools, such as New Markets Tax Credits, to make projects in QOZs more attractive to investors. And, for investors, the OZ Program provides a unique opportunity to capitalize on tax incentives while stimulating economic activity in geographic areas that need it most. Additionally, the OZ Program can serve as a mechanism to exit the so-called “1031 Exchange Treadmill,” thereby allowing investors to access other types of investments that aren’t limited to like-kind property. While additional guidance from the Department of the Treasury is imminent and necessary, the OZ Program has tremendous potential for promoting economic vitality across Colorado.
Marc Schultz, Rebekah Elliott and Jason Brinkley have a strategic expertise in Opportunity Zones and Opportunity Funds practice group at the law firm Snell & Wilmer.