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Indiana is experiencing a concentration of talent, investment and opportunity into a relatively small number of communities.
This trend is increasingly depriving the rest of the state of the capital necessary to combat growing concentrations of poverty through job creation and neighborhood revitalization.
Opportunity Zones were created in 2017 as a temporary federal response to this nationwide challenge aimed at redirecting private capital into distressed communities using tax incentives.
Opportunity Zones were designed to prioritize speed, scale and market knowledge by providing uncapped and back-loaded tax benefits that required investors to invest their own capital.
Since their inception, Opportunity Zones have attracted approximately $100 billion in qualifying equity investments over 5,600 low-income neighborhoods nationwide.
While state-specific impact data is scarce, Indiana investors were probably hesitant to reshape their practices around a temporary program, so we probably did not realize the potential impact of this version of the program.
That limitation is now gone, with Congress making Opportunity Zones a permanent part of the federal tax code in 2025, and all governors must now select up to 25% of eligible census tracts to be zones for the next decade.
The federal government has identified the census tracts that are eligible for selection. Gov. Mike Braun’s administration is now reaching out to local and regional leaders, investors, and community developers to gather their guidance on where the zones can have their greatest impact.
The community-level effects of the incentive can be observed most clearly in the housing sector, where the zones were responsible for a net increase of 313,000 housing units nationally over a five-year period.
While most of these were market-rate units, this acceleration has partially addressed housing shortages in these communities.
Relatively little OZ investment has gone into operating businesses, but the permanence of the updated program should spur new funding mechanisms to do so.
The zones have shown themselves to be a way to accelerate existing investor interest in places of undeveloped opportunity that struggle to attract investment to places with more severe disinvestment.
The most important new feature of OZ 2.0 is a streamlined benefit structure that provides a more uniform incentive regardless of when an investment is made.
Under the updated framework, OZ investors may defer eligible capital gains for five years and, upon satisfying the holding period requirements, receive a 10% reduction in the taxable amount of the original deferred gain.
The program maintains the core long-term incentive: investors who hold qualifying OZ investments for at least
10 years may exclude appreciation from federal capital gains taxation.
New OZ features significantly enhance the tax benefit for rural investments. They establish a new class of opportunity funds through which investors can receive a 30% reduction in the taxable amount of deferred capital gains after five years, versus the 10% standard reduction.
Indiana should expect additional OZ investment due to the permanent and predictable nature of the revised program. The program likely will see a shift to rural areas, more investment in operating businesses and longer holding periods.
The state of Indiana will be conducting a community input and analysis process over the next two months that will attempt to identify challenged communities around the state that evidence the stirrings of reinvestment activity that could be accelerated through OZ tax incentives.
If you have a census tract that you think is prepared to benefit, I encourage you to go to the State’s nomination portal at: iedc.in.gov/program/indiana-opportunity-zones/overview.•
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Taft is director of Interurban at Indianapolis-based Sagamore Institute. Send comments to [email protected].
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