New Opportunity? The Opportunity Zone Program, Part of the New Tax Law, Offers Tax Incentives That Could Impact Forest Landowners
There has been much attention given recently to the Qualified Opportunity Zone Program in the 2017 Tax Cuts and Jobs Act. Opportunity Zones are tax incentives to encourage those with capital gains to invest in low income and undercapitalized communities. The intent of the program is to encourage investment into areas where investors normally would not invest. Any corporation or individual with capital gains can quality. This program potentially provides benefits to investors in three ways:
- Temporary deferral of taxes on previously earned capital gains. Investors can place their capital gains into qualified opportunity funds. Those gains are not taxed until the end of 2026 (sunset of the program unless it is renewed) or when the asset is sold.
- For capital gains that are placed into a qualified opportunity fund and remain in the fund for at least 5 years, the investors basis in the original investment increases by 10%. If the capital gains stay in the fund for 7 years, the investor’s basis in the original investment increases by 15%.
- Potential for permanent exclusion of taxable income on new gains or appreciation of the asset. If an investment stays in a qualified opportunity fund for at least 10 years, investors pay no taxes on any capital gains produced through their investment in the qualified opportunity fund.
The opportunity funds can finance a broad variety of activities and projects. The focus is on creating businesses that create jobs. Examples include industrial and commercial real estate, housing, infrastructure, and improvement/expansion of existing business or start-up businesses. For any real estate project to qualify it must result in the substantial improvement of the property.
The zones or areas where investments can be placed are designated by US census block in each state. The governors of each state nominated the zones and they were officially designated by the US Department of the Treasury. You can view the location of the zones in each state at this website: https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx. In general, the zones are located in distressed communities.
Investors can create their own qualified opportunity fund by self-certifying the fund with IRS or they can invest into an existing qualified opportunity fund with others. The fund must hold at least 90% of the assets in the qualified opportunity zone property. To defer a gain, the investor has 180 days from the date of sale of the appreciated asset to invest the gain into a qualified opportunity zone fund. The interesting way this program differs from a Section 1031 exchange is the investor can re-invest only the capital gain from the sale into the fund, not the entire proceeds from the sale as required for a 1031 exchange. The qualified fund then invests into the qualified property.
So how can this potentially help forest landowners? This is not a program to invest gains into timberland or farmland solely for the purpose of passively growing timber or a crop. However, many landowners likely own land that is within qualified opportunity zone areas and there may be potential for some of that land to be sold into qualified funds for higher uses and values above timberland. In fact, properties located within Opportunity Zones have seen some appreciation in value and marketability already. There may be opportunity for landowners to create or expand businesses that support their forestry/ farming operations. They may be opportunities to create forest product businesses that utilize resources from the landowner’s property. There may be opportunities for investment into logging and trucking businesses that the industry desperately needs in many of the timber producing regions. Finally, the program may be a way for landowners to re-invest capital gains realized in the sale of timber from their property or the sale of tracts of land they hold in a tax effective way.
One major success story of the legislation has been the reopening of a shuttered sawmill in Vicksburg, Mississippi. In fact, the President invited Roy James, the Plant Manager of Vicksburg Forest Products, to attend his 2019 State of the Union address to highlight the success of the legislation. The hardwood sawmill mill was previously called the Anderson-Tully mill and was closed. Roy James, a 26-year veteran of the company and the vice president of operations at the mill at that time, lost his job along with many others when the mill closed. The area was designated a qualified opportunity zone under the Tax Cuts and Jobs Act and a new investor purchased and re-tooled the mill, re-opening it as a southern pine sawmill using this new program. Mr. James was rehired by the new mill owner along with 100 others.
This legislation is new and is evolving rapidly. The purpose of this article is make forest landowners aware of this new program and spur thought into its possibilities. I am not a tax advisor and none of the information contained herein should be interpreted as professional advice. I encourage you to investigate the possibilities in your area with the help of your tax and legal advisors. Our trees often grow in areas considered “undercapitalized communities.” Perhaps there is an opportunity in the Opportunity Zone Program for forest landowners as well.
This article originally appeared in the January/February 2020 issue of Forest Landowner Magazine.