Newberg secures Opportunity Zone designation

In 2018, the U.S. Treasury made opportunity zone designations across the country to encourage long-term investments through a federal tax incentive. Governor Brown's nomination resulted in Newberg and 85 other qualified opportunity zones in Oregon.

Opportunity Zone is a designation created by the Tax Cuts and Jobs Act of 2017 allowing for certain investments to have tax advantages. Opportunity Zones can deliver significant tax savings on medium- to long-term investments in economically disadvantaged communities. This new tax incentive pertains to both the capital gains invested initially through a qualified opportunity fund, as well as capital gains earned for the investor from businesses or projects in a zone.

Each zone consists of an entire census tract, as established for the decennial U.S. Census. Tracts vary in size but generally align with population density meeting the definition of a "low income community" in terms of median family incomes or poverty rates.

The designations are in effect until December 31, 2028, and offer a predictable basis for private investment decisions over several years.

An investor who realizes certain capital gain income may reinvest the capital gain in an Opportunity Fund within 180 days.

In order to qualify, the Opportunity Fund needs to invest more than 90% of its assets in Qualified Opportunity Zone Property that is located in an Opportunity Zone. The property must be significantly improved, which means it must be an original use or the basis of the property must be doubled of the basis of the non-land assets. Capital gain taxes are deferred for investments reinvested into investments in these zones and, if the investment is held for ten years, all capital gains on the new investment are waived.

An investor will need to invest in an Opportunity Fund by the end of 2019 in order to meet the seven-year holding period and be able to exclude 15% of the deferred capital gain. An investor may exclude 10% of the deferred capital gain by investing in an Opportunity Fund by the end of 2021 in order to meet the five-year holding period.

Opportunity Zones now allow an investor to defer capital gains taxes by trading one asset with another asset in a different asset class.

What are the Tax Advantages?

The private capital for projects or businesses in a qualified opportunity zone arise primarily from the unrealized gains of U.S. taxpayers—that is, the increased value of assets (stocks, land, etc.) since they were originally purchased by the individual or corporation currently holding the asset. When an asset is sold and the gains realized, an income tax liability is normally generated.

With the opportunity zone incentive, gains that are transferred into a qualified opportunity fund within 180 days of being realized will have their tax liability delayed or deferred until December 31, 2026, at the latest. The taxpayer decides how much of his/her newly realized gains to invest, when to sell or exit that investment, or even whether to invest other moneys alongside.

In addition to deferring income taxes, by the time the investment of tax deferred gains in the opportunity zone is sold or the end of 2026, whichever is earlier:

The amount subject to taxes shrinks by 10%—in that the basis in the investment increases—if the investment has been held for at least five years.

If held for at least seven years in total, the basis increases by an additional 5% pts (15% in total).

The amount subject to taxes is effectively the fair market value of the investment, if it has declined in value.

If the investment of tax deferred gains appreciates after having been held for at least 10 years, then those new capital gains earned in the zone are themselves completely tax free. Otherwise, the net income or proceeds generated by a zone investment are taxable.

 Investors

Investors seeking to maximize the after tax return on their tax deferred gains could put money into qualified opportunity zones anywhere in the country, or they might be able to choose qualified opportunity funds that have a regional or other type of emphasis. Despite sharing some common geography, these tax benefits work quite differently from New Market Tax Credits, or for that matter, from any other federal program or incentive. Certain critical details, however, will depend on near term guidelines from the Internal Revenue Service (IRS).

The city of Newberg understands the importance of supporting local businesses.  A healthy business sector is a key component to having a healthy community overall.   The city is excited to have secured this opportunity  zone designation.  It is a great addition to our community’s economic development “toolbox” and another way in which the city helps our local businesses stay competitive in a fast-changing, global economy.