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Opportunity Zone FAQs
Q: WHAT ARE OPPORTUNITY ZONES?
A: Established in the 2017 U.S. Tax Cuts and Jobs Act, Opportunity Zones offer incentives for patient (long-term) capital investments all over the nation in low-income communities in which investment has been sparse and growth of businesses has been minimal. There are three types of tax incentives that relate to the treatment of capital gains. Each of the incentives are connected to the longevity of an investor’s stake in a qualified Opportunity Fund, for 10 years or more.
Q: WHAT IS AN OPPORTUNITY FUND?
A: It’s any investment organized as a corporation or partnership for the purpose of investing in “qualified Opportunity Zone property.” The fund holds at least 90% of its assets in the zone property stocks, partnership interests or business property. A fund could be of any size, and could oversee a single project or serve a defined area (city/region) or state, or be multistate.
Q: WHAT QUALIFIES AS AN OPPORTUNITY ZONE?
A: It must either be a low-Income community or contiguous to a designated low-income community and subject to certain statutory limitations.
Low income community: Any population census tract with a poverty rate of at least 20 percent. Targeted populations, areas not within census tracts, low population tracts and high migration census tracts may be eligible under defined statutory guidelines.
Contiguous: Census tract directly adjacent to one or more low-income communities. The income of the desired contiguous tract has to be less than 125% of any neighboring low income tract.
Q: WHO DESIGNATES OPPORTUNITY ZONES TRACTS?
A: The governor of each U.S. state nominated tracts by March 21, 2018 for their potential for improvement.
Also, clustering census tracts enhances the opportunity presented. Investors are not likely to invest in high risk census tracts that have little to no potential.
Q: CAN A DESIGNATED OPPORTUNITY ZONE BE CHANGED?
A: No, once approved by Treasury, Opportunity Zone designations will remain in place for a period of 10 years (Designation Period).
Q: HOW MANY ELIGIBLE CENSUS TRACTS QUALIFY IN MICHIGAN?
A: 1,152. A maximum of 25% – or 288 – of these tracts can qualify.
Q: ARE THERE OPPORTUNITY ZONE INCENTIVES?
- 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.
- Step-Up in Basis: For capital gains reinvested in an Opportunity Fund, the basis is increased by 10% if the investment is held by the taxpayer for at least five5 years and by an additional 5% if held for at least seven7 years. As a result, up to 15% of the original gain from taxation is excluded.
- Permanent Exclusion from taxable income of capital gains from sale or exchange of an investment if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.
Q: WHAT CAN OPPORTUNITY FUND INVESTMENTS BE IN?
A: Opportunity funds can be used to create new businesses, new commercial or residential real estate, or infrastructure. Opportunity Funds can be used to invest in existing businesses if it doubles the investment basis over 30 months.
Q: CAN OPPORTUNITY FUND INVESTMENTS BE USED WITH OTHER INCENTIVES?
A: They can be combined with other incentives such as New Market Tax Credits (NMTC), Low-Income Housing Tax Credits (LIHTC), and historic rehabilitation tax credits. State and local governments can also consider other opportunities, such as job training, to help entice investors.
Q: ANY BUSINESSES AN OPPORTUNITY FUND CANNOT INVEST IN?
A: An Opportunity fund cannot engage in any of the following private or commercial “sin” businesses.
- Golf courses
- Country clubs
- Massage parlors
- Hot-tub facilities
- Suntan facilities
- Casinos, racetracks or other establishments where gambling takes place
- Any business whose principal purpose is the sale of alcoholic beverages for off-premise consumption
Q: DOES AN INVESTOR NEED TO LIVE IN AN OPPORTUNITY ZONE TO TAKE ADVANTAGE OF THE TAX BENEFITS?
A: No. Even if they don’t live, work or have a business in an Opportunity Zone, investors can reap the tax benefits. All they need to do is invest in a Qualified Opportunity Fund.
Q: HOW DOES A TAXPAYER BECOME CERTIFIED AS A QUALIFIED OPPORTUNITY FUND?
A: To become a Qualified Opportunity Fund, an eligible taxpayer self- certifies (so no approval or action by the IRS is required). To self-certify, a completed form must be attached to a federal income tax return for the taxable year (the return must be filed on time, taking extensions into account). A corporation or partnership uses IRS Form 8996 to certify that it is organized to invest in qualified opportunity zone property. In addition, a corporation or partnership files Form 8996 annually to report that the QOF meets the investment standard of section 1400Z-2 or to figure the penalty if it fails to meet the investment standard. See IRS instructions for Form 8996 (Rev. December 2018) Qualified Opportunity Fund.
Q: IF AN INVESTOR SOLD SOME STOCK FOR A GAIN AND, DURING THE 180-DAY PERIOD BEGINNING ON THE DATE OF THE SALE, THEY INVESTED THE AMOUNT GAINED IN A QUALIFIED OPPORTUNITY FUND, CAN THEY DEFER PAYING TAX ON THAT GAIN?
A: Yes. Under 1400Z-2(a)(1) of the Internal Revenue Code, the tax on some or all of that gain can be deferred. But, if, during the 180-day period, they invested in one or more Qualified Opportunity Funds an amount that was less than their entire gain, they may still elect to defer paying tax on part of the gain, up to the amount they invested in that way.
Q: HOW DO INVESTORS ELECT TO DEFER GAIN ON THE SALE OF THE STOCK?
A: They may make an election to defer the gain, in whole or in part, when filing their Federal Income Tax return in the following year (that is, they may make the election on the return on which the tax on that gain would be due if they do not defer it).
Q: WHERE CAN I GET MORE INFORMATION?