So, you are considering an Opportunity Zone investment and you want to bolster your tax offset? Consider combining your investment with the New Markets Tax Credits scheme, which in some cases can cover the same project and allow you to double down on your investment.
The New Markets Tax Credits, or NMTC, were established as part of the Community Renewal Tax Relief Act of 2000 to encourage investment in low-income areas, creating jobs, supporting industry, and eradicating food deserts.
Investors can get a credit against their federal income tax for specific activities including the development of real estate or community facilities, or by running businesses in low-income areas.
Investors make equity investments in the areas through US Treasury-certified Community Development Entities (CDEs) and can write off 39 percent of the original investment claimed over 7 years. The CDEs apply for and are awarded the tax credits to run community-building programs including loans, investments, and financial counseling. They have a mission to serve low-income communities and are accountable to them.
There is about $1.3 billion spent in NMTC annually, mostly in retail, mixed-use, manufacturing, and health care businesses and nonprofits.
So investors benefit from the tax break while supporting the growth of low-income communities by bringing private investment to the area. Sound familiar? That’s because there is a lot of overlap between this program and others, like Opportunity Zones.
The Tax Cuts and Jobs Act, which governs Opportunity Zones, has a fairly loose interpretation of what kinds of investments will support its goals. With an approach that any investment is a good investment in disadvantaged areas, the regulations allow for investors and counties to decide what kinds of development the area needs. It is a Trump Government initiative, based on its free-market ancestors, the Reagan-era Enterprize Zones.
The New Markets Tax Credits program, on the other hand, came from the Obama administration. It is much more prescriptive about what can be a qualified investment and how it should run. While also geographically bound, the CDEs are beholden to the needs of the communities in which they operate and their activities are audited by the Treasury.
However, the programs use some of the same geographic and social criteria to guide investments to key disadvantaged areas, which means if you pick the right project, you can stack your offsets.
There is nothing stopping you from using New Markets Tax Credits inside an Opportunity Zone and benefitting from both federal tax and Capital Gains Tax offsets.
Stacking both credit programs can be a perfect match if your project:
– Is in an area where Opportunity Zone and NMTC zones overlap
– Creates jobs, supports industry or tackles food deserts
– Is capital or equity investment in, or loan to, a qualified active low-income community business
– Is willing to make substantial improvements to the property – usually the same amount as the purchase price
– Can keep the money invested at least for seven years, and ideally for a decade
In fact, the New Markets Tax Credits and Opportunity Zones can potentially be combined with a third offset for developers: the Rehabilitation Tax Credit.
When considering your investment options, make sure you’re keeping your tax burden at top of mind and making smart decisions with your money. Launching your project in an Opportunity Zone using the New Market Tax Credits could be a great investment for you and a shot in the arm for the community that surrounds it.