The Opportunity Zones program was established by Congress in the Tax Cut and Jobs Act as an innovative approach to spurring long-term private sector investments in low-income urban and rural communities nationwide.
The program establishes a mechanism that enables investors with capital gains tax liabilities to receive favorable tax treatment for investing funds in designated Opportunity Zones. Opportunity Fund investments are limited to equity investments in businesses, real estate, and business assets that are located in a Qualified Opportunity Zone. However, investments in “sin” businesses such as a golf course, country club, massage parlor, hot-tub or suntan facility, gambling site, or liquor store.
Financial entities can create an Opportunity Fund, including banks, venture capitalists or local investors and developers. Ninety percent of the fund’s assets must be invest in real property, a new or existing business, equipment or stock within a designated Opportunity Zone. There are four Census Tracts designated as Opportunity Zones in Hampton which allow investors to defer taxes until December 31, 2026, and receive a discount on the capital gains tax of 15%. The key to this incentive is the deferral coupled with the ability to not pay any tax on the gain after 10 years. The amount of tax incentive depends on length of the investment:
- Fewer than 5 years: deferred taxes;
- 5-7 years: deferred taxes plus 10 percent reduction of the original capital gains tax;
- 7-10 years: deferred taxes, plus 15 percent reduction of the original capital gains tax;
- 0+ years: deferred taxes plus no additional capital gains tax on the appreciated investment.
Example of how the zone works:
In 2018, an individual investor sells 1,000 shares of Amazon stock that they purchased in 2013 for $250,000. The sale at $1,250 per share results in a $1 million capital gain. Instead of paying the $238,000 in federal capital gains tax on this sale, the investor rolls their $1 million gain into a Qualified Opportunity Fund that invests the capital in newly issued preferred stock shares of various operating businesses located in Opportunity Zones with a plan to liquidate the fund in 2028. The assumed value of this investment in 2028 is $2 million. The benefits received by this investor include:
- Investing $1 million instead of the $762,000 that would be remaining if the capital was not re-invested into an Opportunity Fund.
- Paying $202,300 in taxes in 2026 instead of paying $238,000 in 2018.
- Owing no additional tax on the $1 million in capital gains on the Opportunity Fund investment realized in 2028.
Leverage the Investment
Hampton has other incentives which can leverage as part of the Opportunity Zone Fund to further make Hampton a great investment:
The Downtown Hampton and Phoebus Retail Incentive Grant Program is designed to provide financial assistance to retail property owners and retail business owners located within the Downtown Hampton and Phoebus Master Plan areas. The purpose of this program is to increase the retail presence and sales in Downtown Hampton and Phoebus by providing incentives designed to attract and retain quality retail businesses.
Commercial and Industrial structures that are 25 years or older are eligible for a 6-year exemption of the increased assessed value of the property after a substantial rehabilitation. The exemption commences on the first taxable year following completion at a rate of 100% of the increased assessed value for the first 3-years and 50% remaining 3-years. For a property to be considered substantially rehabilitated the value of the structure has to be increased by at least 60% without increasing the total square footage by more than 25%.
The City of Hampton has two state-designated Enterprise Zones, the Hampton Roads Center and the Hampton Urban. Two State incentives are available to existing and new businesses to aid the expansion and relocation of facilities.