Jackson Dearborn Partners was one of the first groups in the country to launch, fulfill, and deploy an Opportunity Zone Fund. The $10M Campustown Opportunity Zone Fund I was oversubscribed in June 2019 and fully deployed by August 2019. JDP is actively raising capital for new Opportunity Zone funds and individual projects, more details on the Investment Opportunities page.
What are they?
- Qualified Opportunity Zones (Ozones) were created as part of 2017’s Tax Cuts and Jobs Act, under a new provision in section 1400Z.
- Ozones are formally designated low-income population census tracts that were nominated by the Governor’s office for each state, chosen from a list compiled using U.S. Treasury guidelines.
- There are over 8,700 Ozones throughout the United States and its territories. Ozones can account for up to 25% of designated census tracts in any given state.
- Ozones include urban, rural, and suburban areas, as well as locations zoned for commercial, residential, and industrial development.
- The current Ozone designations will remain in effect until December 31, 2028.
- The provision intends to serve as a catalyst for economic investment in low-income and under-developed communities by offering preferential tax treatment for capital gains invested in a Qualified Opportunity Fund (Ozone Fund).
How do they work?
- An Ozone Fund is a private sector investment vehicle that has the specific purpose of investing in Ozone assets and enterprises.
- To participate in an Ozone Fund – and receive the tax incentives – a person must generate a capital gain and then allocate the capital to an Ozone Fund within 180 days of realizing the gain.*
- The Ozone Fund must then purchase an Ozone property – and substantially improve it – within 30 months.
Why Invest in Ozone Funds?
Upon proper execution of a successful real estate investment in an Opportunity Zone, capital gains invested in Opportunity Zone Funds stand to receive the following tax benefits:
Deferral of capital gains taxes on Ozone Fund investment until December 31, 2026
Reduction of up to 15% of capital gains taxes if held until December 31, 2026
All investment gains excluded from taxable income if asset is held for at least 10 years
Example: Fund Net Multiple: 3.0 X
|23.8% Capital Gains Tax Rate*||10 Year Hold - Standard Tax Scenario||10 Year Hold - Ozone|
|Capital to Invest||$762,000||$1,000,000|
|Value After 10 Years||$2,286,000||$3,000,000|
|Tax on Appreciation||$2,286,000||$0|
|Deferred Capital Gain Tax||N/A||$202,300|
|After Tax Funds Available||$1,923,288||$2,797,700|
* 20% Capital Gains Tax + 3.8% Net Investment Surtax
In the example (above), the $1,000,000 of capital gains invested in a standard tax scenario would eventually pay $600,712 in taxes if their investment tripled in value over 10 years. The total taxes paid would equate to 26.28% of the eventual value of $2,286,000.
In the Ozone scenario, not only is the overall investment larger, as all $1,000,000 would be at work, but the permanent exclusion of gains on the appreciated value mean that the investment pays a total of $202,300 in taxes, or just 6.74%, on an investment that is eventually worth $3,000,000.