
New law lets you defer capital gains taxes by investing in opportunity zones - rmason
https://www.recode.net/2018/10/16/17940120/opportunity-zones-sean-parker-silicon-valley-wealth-taxes
======
Rebelgecko
I believe the way that the program works is you can _defer_ taxes from your
original capital gains (and the cost basis gets increased so your deferred
taxes are less than you would pay otherwise), reinvest them in an "opportunity
zone", and not pay capital gains on _your investment on the opportunity zone_
, if you hold it long enough

e.g. Bob bought Apple stock for $50 a share back in the day, and sells it for
$200/share. He defers his taxes until 2026. Instead of paying capital gains
tax on $150/share, the cost basis is adjusted by 15% so in addition to
benefiting from the time value of money, future Bob will only be taxed on
$142.50 of capital gains. Bob can buy a house in an "opportunity zone" (from
scrolling around the embedded map, there's plenty of million dollar+ houses in
these areas. There's also lots of sports teams and stadiums in these areas, so
maybe Bob buys an NFL team or a parking lot next to their stadium), rent it
out for 10 years, sell it, and not have to pay any capital gains tax on the
appreciation. Definitely not a bad deal for him!

~~~
adamhooper
Close - but Bob in your example also has to improve the basis of whatever he
buys by 100% within a 30 month period. So that could be a major renovation of
the house, building another unit on the property, scraping and rebuilding etc.

Unfortunately it's not as easy as parking money and riding off into the tax
free sunset. As I mentioned down thread, we should hopefully have the first
set of regs from Treasury even as soon as tomorrow which will clarify a lot of
the loose ends as written in the initial legislation.

Some of what we're waiting to see is whether or not that basis improvement
includes the land value or if you can split that out. If the home Bob
purchases for $300k is on a lot worth $250k, does he have to spend the full
$300k to improve it, or just $50k to improve the basis of the structure?

Lots of details to still work out but hopefully we'll know more shortly.

~~~
null000
Isn't that kinda a value-neutral proposition for the area though? Yes, there's
a nicer house or whatever now, but 100% of the value add goes to the person
who is now going to sell the property and get their investment back with
change. The area ends up with the same effective wealth, since they have to
send money to the out of state investors to claim ownership over the renovated
house or whatever.

(also that assumes the people ever sell it to someone in the area - if we're
talking real estate, there's no reason for them to not just sit on it forever
and turn it into a rental or Airbnb or whatever)

~~~
miscreanity
The benefits are not purely monetary - raising the quality of an area due to
investment that otherwise would never come in is an enormous benefit for
people already living there.

That isn't too say throwing money at a bad neighborhood is guaranteed to
succeed but it gives a far better shot than letting the area simmer in
stagnation.

~~~
0xB31B1B
I don’t think most people living in these “opportunity zones” are going to be
happy with people basically being tax incentivized to make housing more
expensive in the area in which they live, thus making life harder for them.

~~~
YokoZar
If you improve a mansion to be a fancier mansion, you don't increase the
supply of housing.

If you improve a small lot to be a duplex or an apartment complex, you
increase the supply of housing.

The latter wouldn't raise the net price of housing, but would still be a
worthwhile investment. It depends on what local policy is, namely if building
new housing is illegal or not.

~~~
soared
Making one house fancier definitely increases rents on neighboring properties.
If I live in a rundown house in a nice neighborhood and fix it up, everyone
else's house increases in value. Same goes for making 1 house really nice in a
bad area.

------
adamhooper
What irks me about this article is its sole narrative on billionaires helping
billionaires. Nowhere in the regs does it say that somebody with a $100 gain
couldn't invest that into a project.

Granted there are other regulatory issues that will limit a lot of this
activity to accredited investors (via Reg D private placements), but OZ regs
have nothing to do with a persons net worth or income.

As other posters have commented, the benefits are three fold - deferring your
gain until the end of 2026, a 10% step up in basis on the gain if you hold for
5 years, an additional 5% step up if you hold for a full 7 years, and an
exemption on tax for the appreciation of the assets you've invested in if you
hold them for 10 years.

Here's a link to an ebook we just put out if anybody has interest in reading
how it will work in the real estate space -
[https://www.realcrowd.com/blog/2018/10/the-real-estate-
inves...](https://www.realcrowd.com/blog/2018/10/the-real-estate-investors-
guide-to-opportunity-zones)

~~~
tanderson92
"Poor people are just as free to avoid taxes on their long-term investments in
illiquid capital-intensive projects as millionaires and billionaires" is not a
take I expected to see, but thank you HN for proving me wrong.

~~~
charlesdm
People cry tax avoidance, but I'm assuming these will MOSTLY be areas where no
one and their mother would want to reasonably invest. Areas with little hope
for the people there to establish themselves in a good life.

If this moves some money into these underdeveloped areas, after a 10 year
stock market bull run, then great. Most of the investments will go to zero,
but the ones that don't might have a good impact for the people living there.

~~~
wefarrell
I live 2 blocks from one of these areas and used to live in one. I was
immediately able to find a 400 sq foot studio for $3,250 per month inside one:

[https://streeteasy.com/building/235-adams-street-
brooklyn/14...](https://streeteasy.com/building/235-adams-street-brooklyn/14a)

~~~
njarboe
Not saying that things aren't really expensive but this place has a "days on
market" of 1529 and is 20% bigger at 473 sq ft.

------
jpatokal
Looks like a big chunk of Menlo Park/Palo Alto is a designated OZ:
[https://www.policymap.com/maps?i=9964345&btd=6&period=2018&l...](https://www.policymap.com/maps?i=9964345&btd=6&period=2018&lind=111&cx=-97.75981946970943&cy=38.21448287372515&cz=3&slc=J8my6tS)

Including heartbreaking scenes of crushing poverty like this:
[https://www.google.com.au/maps/place/DLA+Piper/@37.4595117,-...](https://www.google.com.au/maps/place/DLA+Piper/@37.4595117,-122.1425751,3a,75y,90.23h,89.59t/data=!3m6!1e1!3m4!1suXbTZ64lWTsToKwvU8D8QA!2e0!7i13312!8i6656!4m5!3m4!1s0x808fbb6dd7463e47:0x877cdb5583601213!8m2!3d37.4595462!4d-122.1425615)

~~~
Ninjak
That's the slice of EPA west of the freeway. Yes, the Four Seasons is there,
but it's legitimately an impoverished area compared to surroundings. Compare
the run-down apartments on Woodland against the neighborhood in PA across the
creek. Seems like a legitimate OZ.

~~~
asah
Can confirm

~~~
fosco
I am I understanding this correctly... it sound like this was successfully
exploited by businesses and poor cannot take advantage of the benefits?

if accurate I think this is a problem with many of the incentives that are
provided, maybe providing the tax incentive would be better directed towards
saying to take advantage of this opportunity you must provide something that
the public can use?

------
perpetualcrayon
My worry. As was mentioned in the article these billionaires have teams of
lawyers / accountants working to ensure the money stays in their hands. What's
keeping them from having those teams of lawyers concocting vapor-corps in
these opportunity zones (or whatever the loophole is) which will make little
to no positive (and maybe negative) impact on the opportunity zone while
ensuring the billionaires keep the incentives regardless.

EDIT: Or worse yet there will be organizations whose sole purpose is to take
in billionaires money, do as little work as possible, and generate enough
paperwork to ensure the billionaires qualify for the tax incentives.

~~~
deytempo
I think you are referring to non profit organizations

------
noetic_techy
Probably massive amount of money to be made by a company that can systematize
this whole process. They know the laws and the codes, they know what gets
returns in some areas and not others. I predict cookie cutter improvements
being dropped into these zones at some point as everyone figures out where
works and what doesn't. It will be interesting to see how this plays out.

~~~
noahl
And this would be ... a spectacularly good outcome.

In order to do this, the company would have to develop a workable, repeatable
model of how to economically improve an "opportunity zone". There's some
evidence that this is a very hard problem, notably that social service
agencies have been trying to do it for more than 100 years. But sure, if a
company can find a solution, that would be great.

The danger is that the company would find a solution that somehow followed the
letter of the law but not the spirit, like finding an investment with
nominally high returns that doesn't actually improve the lives of the people
living in the opportunity zones. That's definitely a danger, and possibly a
likely outcome. But another possibility is that there are fairly
straightforward ways to improve the lives of people in these zones that
haven't happened because the people in them don't have the capital to do it.
If that's the case, then incentivizing outsiders to put in that capital should
be a good thing. I don't know what will happen, but it seems like it's worth a
try.

It would be nice if the program was well managed, because good management
could probably reduce and mitigate the negative gaming-the-system outcomes and
promote the good ones. But I don't have a lot of confidence in Congress to do
a good job with updates, so I hope the original bill was written well enough.

~~~
noetic_techy
I never said it wasn't a good thing!

~~~
noahl
Very true!

------
bobthepanda
The devil is in the details. What's the definition of an "opportunity zone",
for instance?

We already have a similar program for EB-5 visas; the definition of
economically challenged area is often an up-and-coming area gerrymandered to
include just enough poor people.

Source with rather clickbaity introduction:
[https://www.citylab.com/equity/2017/05/kushner-companies-
rea...](https://www.citylab.com/equity/2017/05/kushner-companies-real-estate-
and-eb-5-cash-for-visas-reform/525792/)

~~~
adamhooper
Here's a map showing all the OZ's:
[https://www.policymap.com/maps?i=9964345&btd=6&period=2018&l...](https://www.policymap.com/maps?i=9964345&btd=6&period=2018&lind=111&cx=-97.75981946970943&cy=38.21448287372515&cz=3&slc=J8my6tS)

Anything purple on there is designated an OZ.

~~~
bobthepanda
Looking at New York, I see the area around the Navy Yard, Long Island City,
Bushwick, Astoria, and Flushing - all areas that are already undergoing huge
amounts of real estate development and are hardly "struggling."

I'm worried that this has good intentions but will have unintended effects;
it's entirely possible that turning on a fire hose of money would just wash
the existing residents away. While on paper that would improve the income
level and whatnot of a census tract, you really just shuffled people around
the metro area, most likely to a place with worse access to jobs and stores
and whatnot. It's important that we increase housing at a macro level, but we
also don't want to strand people by suburbanizing poverty.

------
beagle3
Israel had (maybe still has?) what was called “angel taxing” which said
investment in a startup (for some definition of startup) is optionally marked
to zero at the point of investment, which means that if you had any gains, you
could net them against this investment.

This is the opposite of deferring capital gain taxes - it is pulling capital
losses forward. If the startup folds, the marking down is justified. If it is
successful, the capital gains when eventually selling it reflect the zero
base; so overall, taxes stay the same except it incentivizes capital
investments immediately after capital gains.

------
sprashanth
A good chunk of Olympic National Park seems to be an opportunity zone. Can
anyone fill me in on what an 'investment' there might entail? IIRC, commercial
activities are usually heavily restricted in national parks.

~~~
ur-whale
Doesn't look like the park itself is an OZ. OTOH, the OZ west of the park
seems to be reservation land, which likely brings its own set of problems when
it comes to investing.

[edit] source:
[https://www.policymap.com/maps?i=9964345&btd=6&period=2018&l...](https://www.policymap.com/maps?i=9964345&btd=6&period=2018&lind=111&cx=-97.75981946970943&cy=38.21448287372515&cz=3&slc=J8my6tS)

------
talltimtom
So in the midst of an investment boom we are engineering ways not only to
reduce tax on gains, but to ensure the gains will be reinvested. Yet at the
same time this provides no value if people pull out their investments in a
down-market. Sounds like A bubble-policy.

~~~
C1sc0cat
Well if they pull out there will be some commercial / residential property
assets going cheap.

That's why investing via closed end property funds is much better individual
properties are very illiquid .

------
com2kid
I am wondering why Pioneer Square, one of the hottest locations in Seattle,
has been classified as an OZ.

Aside from the crippling poverty outside the doorsteps of all the tech company
offices that is. ...

~~~
btgeekboy
Pioneer Square is not a hot location; all of the tech action is happening to
the north in SLU and a bit into the downtown retail core. Pioneer Square is a
dump and sketchy as hell.

~~~
com2kid
There are a ton of tech companies in Pioneer Square. Geekwire has this 5 year
out of date map, [https://www.geekwire.com/2013/pioneer-square-tech-map-
techie...](https://www.geekwire.com/2013/pioneer-square-tech-map-techies-
hanging-shingles/) but just walking through there, Pioneer Square is tech city
during the day. From trendy bars to expensive boutique clothing stores. Other
startups, such as Real Self, have come into being since that (ancient) list
was made.

There are multiple co-working spaces within blocks of each other, The Pioneer
Collective, Galvanize, Impact Hub, and at least 2 accelerators that I know of
are based near Pioneer Square.

------
duxup
I'm skeptical as we've seen with folks like the Kushners plenty of folks will
build some fancy high end / highly profitable development "near" places that
could use some improvement.... but they don't really help anyone in those
zones.

------
dawhizkid
Who decides what is an OZ or not? I honestly would be surprised if the
person(s) who gets to decide what is or isn't an OZ now and in the future
hasn't already been bribed by an interested investor.

~~~
heurist
State governors selected the zones over the last year.

------
dev_dull
> _write off on their taxes._

Thankfully the poster got it right but the headline from the article itself is
very misleading. Deferring taxes != writing off investments.

Also, why does the headline writer take shots at billionaires for putting
money to work in economically challenged areas?

I swear some of these people will never be satisfied with the way rich spend
their money.

~~~
Thriptic
Agreed, it's very silly. No one attacks people in the upper middle class for
using mortgage deductions, tax advantaged investment vehicles (ie 401Ks),
education accounts, tax loss harvesting etc to minimize tax burden; however,
whenever a wealthy person tries to minimize their tax burden, they are
immediately judged. It is not reasonable to state that one group of people can
take advantage of tax code incentives and other groups cannnot.

~~~
ip26
Middle class folks who are using the mortgage deduction generally use it
exactly as intended. They don't have an army of accountants on retainer to
figure out how to game the tax code and accomplish things that weren't really
intended.

The example that always sticks in my head- maybe this isn't true, but I've
heard there are strategies of buying failing companies for pennies, shuttering
them, and then writing off their losses on your own taxes. You incurred no
risk, you lost no money, and now you pay no taxes. Whether it's actually
intended to happen that way, it doesn't seem right, and ordinary people can't
do it.

Anyway, I'm not an accountant, but the upset over the tax exploits of the
wealthy revolve around the concern that they are managing to exercise the tax
code in a way that was never intended to pay less than they were meant to owe.
Middle class folks don't wind up in the crosshairs because they generally file
very ordinary returns, following both the letter as well as the spirit.

~~~
AnthonyMouse
> The example that always sticks in my head- maybe this isn't true, but I've
> heard there are strategies of buying failing companies for pennies,
> shuttering them, and then writing off their losses on your own taxes. You
> incurred no risk, you lost no money, and now you pay no taxes. Whether it's
> actually intended to happen that way, it doesn't seem right, and ordinary
> people can't do it.

That's the problem with most of these situations -- people don't understand
what's really happening.

Suppose you have a company that started off with $25 million thinking it would
turn it into fifty million, but really it turned it into five million. Then
the company is still worth $5 million dollars, right? Except that it has a
$20M tax loss, which is worth something. When other people have profits
they're paying a 35% tax rate on, the tax loss has a market value of $7M, so
the company is actually worth $12M.

Which means that's what richie rich who wants to use the tax loss has to pay
for it, since the seller can shop the tax loss to the highest bidder and get
close to the full value for it. The money isn't going to the rich guy, it's
going to the guy with the tax loss.

Which means it's a rule that helps the little guy. If you take a risk and
fail, it allows you to at least recover as much of your investment as the big
guy with diversified investments would have had as a tax deduction -- i.e. it
prevents creating a disadvantage when the little guy takes a risk vs. the big
guy. And if you have creditors, the buyer has to make them whole in order to
take the tax loss, which makes them more likely to lend to you to begin with.

But people see the result that rich people are getting a tax deduction and
clamor to get rid of the rule.

~~~
ip26
If it actually worked how you describe, it wouldn't happen. As the market
value approaches the expected benefit, there becomes no point.

I gather it's a strong buyer's market, in which case this isn't really the
saviour of the little guy.

Also worth considering, if these loss deductions always find their way to the
guy with the highest marginal tax rate- is _that_ really working as intended?

~~~
AnthonyMouse
> If it actually worked how you describe, it wouldn't happen. As the market
> value approaches the expected benefit, there becomes no point.

If you pay $6.9M for $7M in lower taxes, you make $100,000 for free and the
little guy recovers $6.9M. Then one of the other million companies with net
profit realizes they can net $90,000 by offering $6.91M. This is not what a
buyer's market looks like.

Obviously no one is going to offer exactly $7M because they have to cover the
transaction costs etc., but that's not even profit -- if they offer $6.95M
because they have $40,000 in transaction costs, they're only making $10,000,
but they still do it because they're still making $10,000. Until someone else
is willing to make $5000.

It's a seller's market because there are more companies with net profits than
net losses.

> Also worth considering, if these loss deductions always find their way to
> the guy with the highest marginal tax rate- is that really working as
> intended?

This one of the many reasons why graduated tax rates are inefficient as
compared with something like flat rate + UBI (which can be equally progressive
but doesn't have this problem), because it works that way for _everything_.
The same thing applies to losses incurred directly by the big guy. Or if you
create a deduction for green cars, someone paying a 35% marginal rate gets
more from buying the same car than someone paying 15%.

But that doesn't apply to corporations anyway. Corporate tax rates largely
aren't based on income. If they were, splitting an operation into multiple
corporate entities would lower the tax rate and then everybody would do that.

------
seniorsassycat
> Q. What is a Qualified Opportunity Fund A. Qualified Opportunity Fund is an
> investment vehicle that is set up as either a partnership or corporation for
> investing in eligible property that is located in an Opportunity Zone and
> that utilizes the investor’s gains from a prior investment for funding the
> 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.
> (Thus, no approval or action by the IRS is required.) To self-certify, a
> taxpayer merely completes a form (which will be released in the summer of
> 2018) and attaches that form to the taxpayer’s federal income tax return for
> the taxable year. (The return must be filed timely, taking extensions into
> account.)

> The fund must hold at least 90 percent of its assets in Qualified
> Opportunity Zone Property

[https://www.irs.gov/newsroom/opportunity-zones-frequently-
as...](https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-
questions)

~~~
0003
Also see the code here:
[https://www.law.cornell.edu/uscode/text/26/subtitle-A/chapte...](https://www.law.cornell.edu/uscode/text/26/subtitle-A/chapter-1/subchapter-Z)

------
TACIXAT
Alright, a house I own (and am currently failing to sell) is in an opportunity
zone. Hypothetically, is there a way I could benefit from this?

~~~
adamhooper
The benefit is for investing capital gains into OZ's, not necessarily from
selling assets that are in existing OZ's. So if you had a gain on your house
(beyond the homeowner exclusion) you could potentially invest the remainder of
that gain into an OZ project and get those benefits.

There are all sorts of stipulations you need to follow to qualify however -
not all of which are fully in place yet from Treasury. We should be getting
the first version of the regs as soon as tomorrow (imminent we've heard from
folks in DC) and then we'll know more. Things like having to improve the basis
of whatever you invest in by 100% within a 30 month period exist, so you can't
just buy something in an OZ and park it, you have to actually do some
improvement to what you purchase.

------
rdlecler1
So what happens if you make a monitory investment in a startup in an
Opportunity Zone that then moves? This may not be in your control.

------
anigbrowl
Using the map in the article I was intrigued to discover that my home isn't in
an 'opportunity zone' but if it were located 30 feet to the right it would be.
That may explain why my neighborhood has been infested with signage for cash-
up-front house sales (which I have been systematically removing).

------
lr
If someone were to directly buy a distressed property in one of these zones
using money from capital gains, and fix it up (and even live there for 5-10
years), would they realize the same tax benefit as investing in a "fund"?

------
sytelus
TLDR;

The Opportunity Zone program is designed to provide tax incentives to
investors who fund businesses in underserved communities.

Investors are able to defer paying taxes on capital gains that are invested in
Qualified Opportunity Funds that in turn are invested in distressed
communities designated as Opportunity Zones by the governor of each state. Up
to 25 percent of the low-income census tracts in each state can be designated
as Opportunity Zones.

~~~
Bjartr
Census tracts? The ones that are almost nine years out of date or the up to
date ones will have in a couple of years?

------
hyprlogik
This article is great at defining off the bat what the heck an opportunity
zone is. /s

------
perpetualcrayon
Does anyone else think it's categorically wrong for a government to
incentivize greed?

~~~
koboll
"Incentivizing greed" is literally how capitalism works. Or rather, it's
knowing that greed will exist regardless, and then incentivizing the
channeling of that greed toward better outcomes for society.

------
fallingfrog
You know, we should just drop the other shoe and reduce all taxes on rich
people to zero. It's what they pay anyway. It would save us the money of
pretending to tax them.

~~~
manigandham
They definitely don't pay 0. They actually pay a significant portion of all
taxes collected. You won't pay as much in your entire lifetime as the annual
bills for some of these people.

I find it strange to see such animosity against "the rich" on an forum
dedicated to startups from a company that has helped created billions in
market cap and mint several new billionaires in the process.

~~~
fzeroracer
There's strong animosity against the rich because some of us grew up seeing
our families destroyed chasing the american dream while others grew rich off
their misfortune.

That and the constant attempts at reverting certain policies or actions that
would make my QoL demonstrably worse.

~~~
miscreanity
Is it more beneficial for yourself to blame others or figure out how to
improve your situation?

If you're not content to remain a crab in a bucket, it might be a good idea to
meet some successful and/or wealthy people and learn from them.

~~~
fzeroracer
It's funny that you immediately jump to an assumption that I am not doing
well.

The reality is that I'm doing fine in my career and managed to escape poverty
for many reasons I've illustrated in the past. However what I saw and what I
was trying to explain is that I saw my parents destroy their body (and in one
case, lose their life) trying to improve their situation in a country that
hardly gave a shit. I recall vividly the troubles my family had after my
mother had a stroke because insurance companies decided that a stroke was a
pre-existing condition despite her being in otherwise good condition.

Maybe you should stop making assumptions about people based on our animosity
towards people that have actively made our lives worse in the past.

~~~
miscreanity
Without context you'll always get assumptions. Part of discourse is
establishing clarity.

Of course a toxic environment makes life harder.

Glad you're doing well.

------
drb91
Yes, let’s gentrify faster.

~~~
crwalker
If you think gentrification is bad, you should see the alternatives. They are
real. [https://goo.gl/maps/veQSXmD7Z5G2](https://goo.gl/maps/veQSXmD7Z5G2)

~~~
drb91
Depends on your definiton of bad, I suppose. Care to state what you think is
bad? You linked to google maps, from which I can draw a million conclusions,
none of them worth devoting effort to responding to without clarification.

~~~
sokoloff
Do you think the burned out, half-missing roof house adds beneficial je ne
sais quoi to the neighborhood? Which of those houses would you like to have a
next-door neighbor? Which of those houses would have the greatest positive
effect on your willingness to move there, raise a family there, and invest
there?

~~~
anigbrowl
Some places were overbuilt, and it would probably be better to tear down the
remaining structures, clean it up and designate the block as a park. The wrong
approach to development can make things substantially worse for people who
live in marginal neighborhoods.

