Opportunity Zone

In 2018 the Town of Chapel Hill, Office of Economic Development, applied for and got approved a census tract to capture the benefit of an opportunity zone.

Opportunity Zones are designed to spur economic development by providing tax benefits to investors. First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026.   If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain.  If held for more than 7 years, the 10% becomes 15%.  Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.

Additional information-

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Frequently Asked Questions

As a follow-up to the announcement about the designation of Chapel Hill’s first Opportunity Zone, the following FAQs are offered to provide more context and background information.

Our announcement: https://www.townofchapelhill.org/Home/Components/News/News/14279/22

What is an Opportunity Zone?

Opportunity Zones were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017. They are designed to spur economic development by providing tax benefits to investors. 

How were the Opportunity Zones selected?

More than 450 unique North Carolina census tracts were identified for further review, following the public comment and outreach period led by the State. The United States Treasury then certified 252 areas in North Carolina as Opportunity Zones in May of 2018. Of two census tracts eligible within the Chapel Hill corporate limits, the Town’s Economic Development Office recommended the census tract along Martin Luther King Jr. Blvd, North Estes Drive, and East Franklin Street be considered for the designation and was approved through this process. The other tract was not recommended and is not a designated zone. Since the approval process is complete, no other zones can be established unless federal legislation changes.

What criteria were used to determine which census tracts were eligible?

States were authorized to designate up to 25 percent of their total low-income census tracts as qualified Opportunity Zones.  Low-income census tracks are areas where the poverty rate is 20 percent or greater and/or family income is less than 80% of the area’s median income.  The state followed additional guiding principles in making their final recommendations including at least one qualified tract per county.

How do Opportunity Zones Work?

Opportunity Zones are designed to spur economic development by providing tax benefits to investors. First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026.   If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain.  If held for more than 7 years, the 10% becomes 15%.  Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged (Source: US Treasury).

Generally it takes a reasonable sized project that desires to tap the benefit of the Opportunity Zone, develop or participate in attracting investors who meet the qualifying criteria and commit money to that “Opportunity Fund” for a minimum of 5 years for some benefit and 10 years for maximum benefit.  The majority of projects that would pursue this kind of investment strategy are income-producing or, generally speaking, commercial properties.

Do Opportunity Zones Impact Local Land Use?

No. Any entitlement or land use question remains with the local jurisdiction and is subject to all existing rules, regulations and existing approval processes.   

What is a qualified Opportunity Zone Fund?

A qualified Opportunity Fund is a privately managed investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (the vehicle must hold at least 90 percent of its assets in such property). Qualified opportunity zone property includes any qualified opportunity zone business stock, any qualified opportunity zone partnership interest, and any qualified opportunity zone business property.

Who administers Opportunity Zone Funds?

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 a Qualified Opportunity Zone. The Town of Chapel Hill worked with the NC Department of Commerce and to apply on behalf of the census tracts that met the criteria during the application process but will not be involved in administering any funds.

·        Town Opportunity Zone web page: https://www.open2.biz/opportunity-zone

·         The list of North Carolina Opportunity Zones can be downloaded at this link

·         The Department of Commerce has published a website, public.nccommerce.com/oz/ offering more information.

·         IRS: https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions