What are Opportunity Zones?

The U.S. Investing in Opportunities Act, passed last year as part of the new federal tax bill, created tax incentives for investment in designated census tracts called Opportunity Zones. The statute, introduced with bipartisan sponsors led by Senators Cory Booker (D-NJ) and Tim Scott (R-SC), was designed to spur growth in low-income communities by encouraging reinvestment of capital gains into certified Opportunity Funds.

Opportunity Zones (OZs) are probably best understood not as a new grant program but as a new investment tool – similar to the home mortgage interest deduction that creates tax preferences, which then drive individual and market behavior.  

With minor exceptions, the federal statute is not prescriptive in terms of the types of qualified investments, from affordable housing to clean energy to infrastructure to small business to workforce. This provides flexibility – as well as the need – to craft local and state strategies that will focus these investments to ensure they deliver living wage jobs, increase affordable housing, prevent unwanted gentrification and build resilient communities. This work is just beginning and there is time for communities to consider the benefits of the OZ tool, as the U.S. Treasury has yet to issue the full set of investment rules. Investors are expected to begin forming Opportunity Funds in the later part of 2018, after Treasury issues final rules.

What is an 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. A Fund must hold at least 90% of its assets in qualifying property.

The policy enables funds to be responsive to the needs of different communities, allowing for investment in operating businesses, equipment, and real property. For example, funds can make equity investments in or purchase the stock of a company if substantially all of the company’s tangible property is and remains located in an Opportunity Zone. Funds can take interests in partnerships that meet the same criteria. Funds can also invest directly in qualifying property, such as real estate or infrastructure, if the property is used in the active conduct of a business and if either the original use of the property commences with the fund or the fund substantially improves the property. Treasury has yet to release guidance on the substantial improvement test. [Source: EIG]

The U.S. Treasury is still finalizing its rules to implement this new law and guide the Opportunity Funds.

How do I become certified as a Qualified Opportunity Fund?

The U.S. Treasury is expected to issue rules and guidelines for qualifying Opportunity Zone Funds sometime this fall.

Are Opportunity Zones the same as other programs like Empowerment Zones, Enterprise Zones, or Promise Zones?

No. While Opportunity Zones may share some similarities with these earlier programs, this is a brand-new policy.   The U.S. Department of the Treasury maintains a resource site for Opportunity Zones which can be accessed here.

How many Opportunity Zones are there in California?

The Department of Treasury has certified 879 census tracts in California as Qualified Opportunity Zones. The full list of census tracts is available here (download excel file). Or you can see the zones using the integrated map tool.

How were California’s Opportunity Zones selected?

In early March, the Administration put a preliminary recommendation of tracts out for public comment, and then received 2,684 comments regarding 1,518 individual census tracts and 221 comments from individuals, cities, counties, legislators, and organizations.

Following this comment period, the Administration designated our final 879 qualified Opportunity Zone census tracts using this criteria:

  1. Adjusted for High Median Incomes. Limit selection to only those tracts that have a median income below $100,000. This eliminates a number of university campuses that were initially captured due to low student incomes but received a number of comments about not being appropriate for the program.
  2. Followed Local Guidance When Possible. Accept recommendations of local cities and counties to swap preliminary designations for alternative tracts. The comment instructions made it clear these comments would receive top priority and defers to local control and decision making.
  3. Removed Tracts when Critiqued. Remove the 183 tracts that received negative comments.
  4. Focused on Overlap with Existing Programs. The selected tracts are heavily consistent with the designation of the Legislature and Governor for disadvantaged communities for Cap and Trade purposes. Of the chosen tracts, 96 percent overlap with AB 1550 designations and 64 percent have SB 535 designations.
  5. Added Tracts When Requested. Designate those tracts that were specifically requested to the extent feasible within the overall cap.
  6. Geographic Distribution. Using the above criteria and the ability to designate contiguous tracts, the designations include 57 of the state’s 58 counties.
What are the incentives for long-term investment in Opportunity Zones?

Opportunity Zones provide the following capital gains incentives:

  • No up-front tax bill on federal capital gains rolled into a Qualified Opportunity Fund
  • When investments are held for five years, 10% increase in rolled-over federal capital gains basis
  • When investments are held for seven years, 15% increase in rolled-over federal capital gains basis
  • Investors can defer their original tax bill until December 31, 2026 at the latest, or until they sell their Opportunity Fund investments, if earlier.
  • Opportunity fund investments held in the fund for at least 10 years are not taxed for federal capital gains.
How can Opportunity Zones benefit my community?

Opportunity Zones offer incentives for private investors to support underserved communities by allowing for deferral or elimination of federal capital gains taxes. Today, these unrealized capital gains are a significant untapped resource. Allowing capital gains to be reinvested in qualified Opportunity Zones can help to spur economic growth in the communities that need it most.

Among other things, Opportunity Funds can be used to finance new infrastructure and affordable housing, promote job growth, and support workforce development.

What is the State’s role?

The Governor’s office has created an inter-agency workgroup to begin to work with communities and stakeholders to identify early investment opportunities and challenges in preparation for Opportunity Funds coming on the scene later this year and to facilitate equitable and sustainable development using the OZ tool, if possible.

To learn more, contact us.

Can the state list of OZs be re-designated?


The December 2017 tax bill that set up opportunity zones and opportunity funds does not include any possibility for changes after the Governor-nominated census tracts were confirmed by the U.S. Treasury.

The state is working with partners to develop best practices for investment strategies in zone-adjacent properties and neighborhoods.

How might Opportunity Zones affect housing prices or gentrification?

California is already facing a severe housing shortage, and the new Opportunity Zones tax incentive is being closely examined by state agencies and local community leaders for its potential to accelerate the development of affordable housing units across the state and for risks that the tool could accelerate unwanted gentrification.

There are many variables that will influence outcomes of investment in Opportunity Zones; below are some resources that explore those issues:

How can I get more information about Opportunity Zones?

Sign up for our mailing list to receive updates on California Opportunity Zones.

Will the state be conforming its treatment of capital gains to match the federal government?

This issue is currently being considered by the Governor and the Legislature. Governor Newsom’s January budget called for a new integrated approach to local economic development and for the state to consider conforming to federal law allowing for deferred and reduced taxes on capital gains in Opportunity Zones. Specifically, on page 94 of his budget, the Governor’s policy narrative called for reduced capital gains taxes for investments in green technology or in affordable housing, and for exclusion of gains on such investments in Opportunity Zones held for 10 years or more. Read the full statement and learn more at: http://business.ca.gov/programs/opportunity-zones.

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