Texas Opportunity Zones
Opportunity Zones are an economic development tool that allows people to invest in distressed areas in the United States. Their purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors. Taxpayers can invest in these zones through Qualified Opportunity Funds. Texas currently has 628 designated Opportunity Zones, making it one of the most promising areas for Opportunity Fund investing.
Click on map above to view an interactive Texas Opportunity Zone Map.
Texas Opportunity Zones – The Basics
The Opportunity Zone tax provisions were created by the 2017 Tax Cuts and Jobs Act. The Opportunity Zone tax provisions provide investors the ability to re-invest capital gains into a fund that, in turn, invests in projects located in designated census tracts. In exchange for this investment, investors receive a decrease, deferral, and possible exclusion of capital gain tax liabilities. Qualified Opportunity Zone Funds may invest in businesses, real estate, and business assets located within designated “Opportunity Zones.”
Opportunity Fund Tax Benefits
Just like in other states, the Opportunity Zones program offers investors a way to defer their federal capital gains taxes by investing in Opportunity Funds, specialized investment vehicles which must place at least 90% of their assets in eligible businesses or real estate inside a Qualified Opportunity Zone. In order to be eligible for investment, a company must do at least 50% of its business inside a Qualified Opportunity Zone. For a property to be eligible, an Opportunity Fund must be engaging in new construction, or must be investing more into rehabilitating the property than it invested to purchase the property in the first place.
Opportunity fund investors who invest within 180 days of selling an asset can defer paying capital gains taxes until April 2027. If they keep their investment for at least 10 years, they can enjoy a 15% discount on their capital gains tax liability, as well as paying zero capital gains taxes on any appreciation their investment has made since entering the Opportunity Fund.
Opportunity Fund Investments & Texas Historic Tax Credits
Much like the Federal Historic Tax Credits program, Texas has its own historic tax credit program, which was signed into law by Governor Rick Perry in 2013. The program allows investors a credit of up to 25% of eligible costs incurred when rehabilitating a historic building. This credit can be used against state franchise taxes, and can actually be used, saved, and/or spread out over up to five future state franchise tax bills, giving it unprecedented flexibility. In theory, this historic tax credit could be used with federal historic tax credits to maximum investment yields when rehabilitating property owned by an Opportunity Fund.
Other tax credit programs that can be paired with Opportunity Fund projects include the Low Income Housing Tax Credit, designed for affordable housing properties, and the New Markets Tax Credit, designed for commercial property in specifically distressed census tracts, most of which overlap Opportunity Zones.
Texas Enterprise Zone Program And The Opportunity Zone Program
The Texas Enterprise Zone Program is a tax refund program intended to increase job creation and economic activity in lower-income areas of the state. While Opportunity Funds purely investing in commercial and multifamily real estate typically would not be eligible, if an Opportunity Fund were also to invest in job-creating local businesses, the company would be able to take sales tax refund, which could positively impact its profitability. In order to qualify, a business does not necessarily need to be located in an Enterprise Zone, (though it does make it easier). Fortunately, however, many Enterprise Zones overlap Opportunity Zones.