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.
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.