In December 2017 Congress passed the heavily-debated GOP tax bill, with highlighted features such as a $1.5 trillion tax cut, lowered tax rates for individuals and corporations, a cap on mortgage interest deduction at $750,000, and a doubling of the standard deduction and child tax credit. The effects of these changes might make an impact on affordable housing in high-tax states as Americans adapt to decreasing home prices, new caps on mortgage and tax deductions and limits on HELOC deductibility.
While the new tax bill has stirred concern over housing affordability in states with high taxes, especially those located in the Northeast, West Coast and South Florida, attention has now been focused on an aspect of the bill that could help rather than hinder distressed, low-income communities. According to the 2017 Distressed Communities Index by the Economic Innovation Group, one in six Americans, approximately 17 percent of the population, live in economically distressed communities, and the average state has 15.2 percent of its population living in these struggling areas.
An Inside Look: The Investing in Opportunity Act
The Investing in Opportunity Act in the tax bill intends to help funnel capital into distressed communities with the help of private investment. The legislation was introduced by Senators Tim Scott (R-S.C.) and Cory Booker (D-N.J.) and Representatives Pat Tiberi (R-Ohio) and Ron Kind (D-Wis.) in February 2017, and possesses bipartisan support. In effect, the bill offers investors tax incentives to invest stagnant capital gains into the development of underserved communities.
“Too many American communities have been left behind by widening geographic disparities and increasingly uneven economic growth,” stated Senators Scott and Booker in a joint statement. “We come from different parties and regions, but share the common conviction that all Americans should have access to economic opportunity regardless of their zip code.”
According to the DRI Fund, a certified Community Development Financial Institution (CDFI) by the U.S. Department of Treasury, there are currently $2 trillion in capital gains sitting on the table. Instead of leaving money on the sidelines, the act intends to put it towards good use while also benefiting the investor. In return for reinvesting capital gains in a designated “Opportunity Zone”—areas recommended by state governors to the Department of Treasury for certification—investors will be able to defer capital gain taxes.
Opportunity Zones & Funds
What qualifies a low-income community as an “Opportunity Zone”? The official act, provided on Congress’s official website, lists the following requirements.
“Governors must give particular consideration to areas that:
● are currently the focus of mutually reinforcing state, local, or private economic development initiatives to attract investment and foster startup activity;
● have demonstrated success in geographically targeted development programs such as promise zones, the new markets tax credit, empowerment zones, and renewal communities; and
● have recently experienced significant layoffs due to business closures or relocations.”
Investors will reinvest capital gains into Opportunity Zones through an “opportunity fund,” described as an investment vehicle, whether in the form of a corporation or partnership, organized to invest in Opportunity Zones. The Opportunity Fund must hold at least 90 percent of its assets in these areas. Taxpayers with assets reinvested in Opportunity Zones can defer the recognition of capital gains, and receive tax reductions and exemptions, only if their investments have been held for at least five years.
A Win-Win Situation?
The act appears to benefit both investors and economically-distressed communities in need of financial support. Aside from receiving a tax break on their capital gains, investors have an opportunity to make an impact in their local communities. Many investors want to help but do not have the tools or information to take action. As the Economic Innovation Group states, “Many investors are willing to provide the capital, but lack the wherewithal to locate and execute investment opportunities in communities that need it.”
Helping Investors Make A Difference
The Investment in Opportunity Act makes it easier for investors to identify communities in need of capital and utilize CDFIs to deliver their funds where they need to go. CDFIs, which were introduced 25 years ago, are recognized private entities in the United States focused on revitalizing underserved communities. CDFIs facilitate their mission by supporting state and local banks, while financing entities help disadvantaged communities and affordable housing. Individual investors have the option of providing their capital into a CDFI, who will then make sure the money is used appropriately.
Low Cost and Low Risk
This new legislation is also a low cost and low risk opportunity for taxpayers. Investors bear the brunt of the risk for their originally deferred capital gains, although they do receive a tax reduction for long-term holdings. However, there are no tax credits no public sector financing is involved.
Direct Impact for Economically-Distressed Communities
On the other hand, low-income and economically-distressed cities and towns—which include over 52 million American citizens—are benefited by having funds funneled directly into programs that can help with job growth, affordable housing, entrepreneurship and more. Publicly-financed programs and initiatives are difficult to get off the ground, receive funding for, and enforce in practice. This act provides an incentive for investors to reinvest their capital gains back into their community with less hurdles.
The act encourages long-term investment by offering a reduction in capital gain taxes owned on their original investments after holding them for five to seven years. In addition, if investors have qualified investments held for more than ten years, those assets will be exempted from further capital gain recognition over what was deferred originally.
Overall, the Investing in Opportunity Act is a legislative feature of the tax bill that has the potential to have a direct social and economic impact upon underserved communities, benefiting investors, communities and taxpayers alike. It is predicted to be a pivotal catalyst for economic recovery, business development and affordable housing, which could help countless individuals achieve financial stability and economic growth for themselves and future generations.
According to the Local Initiatives Support Corporation (LISC), an organization that is helping to facilitate successful implementation of the legislation, the Treasury has officially designated 8,762 census tracts as Opportunity Zones across the United States at time of writing. NAWRB is keeping track of the latest developments regarding the Investing in Opportunity Act and other policy affecting the housing and real estate ecosystem.