Governor LePage has named Waterville census tract 23011024102, which includes the city’s downtown area, as one of Maine’s thirty-one (31) Opportunity Zones (OZ), a tax benefit program established in the federal Tax Cuts and Jobs Act of 2017. The goal of the OZ program is to convert U.S. investors’ $2.3 trillion in unrealized capital gains into private investment in low-income communities (“Opportunity Zones”), thereby stimulating growth, creating jobs, and increasing prosperity of residents. “This is more great news for our city, and I applaud the Central Maine Growth Council’s efforts to increase investment in Waterville,” said Winifred Tate, City Council Ward 6. “We see more businesses opening in Waterville every day, and the designation of Waterville’s downtown as an Opportunity Zone is one more way we are encouraging growth that will bring prosperity to all.”
Unrealized capital gains are investment profits which have not yet been sold for cash; when sold, or “realized”, these gains are taxed. The OZ program delays or reduces taxation on these gains. Each OZ has an Opportunity Fund (OF), an investment vehicle organized as a corporation or partnership in order to invest in qualified OZ property. The OF must have at least 90% of its assets in qualified OZ property acquired by the OF in 2018. Investors who roll over their unrealized capital gains into an OF can defer the taxes on their gains until 2026, and the longer the gains are invested in OZs, the lower the tax burden. See explanation below for further details.
“We see the OZ program as a game changer for the communities who have been designated. People looking to defer their gains on real estate sales already make up a sizable segment of our investment market base. Given that the OZ program extends beyond the traditional 1031 Tax-Deferred Exchange program, we will see new and exciting business investment opportunities in the zones for investors looking to defer their gains,” explains Chris Paszyc, partner and broker with CBRE | The Boulos Company.
In the spring of 2018, Central Maine Growth Council (CMGC) successfully applied for the designation and is currently working with investors to utilize the program.
“With eligibility in Waterville’s downtown district, inclusion into the OZ program comes at an exciting time for the city and its downtown, as participating in the program illustrates Waterville’s commitment to revitalize and develop the local community, which is a key component of our economic development strategy,” said Garvan D. Donegan, Director of Planning & Economic Development at Central Maine Growth Council. “Over the last few years, the downtown has seen $65.5 million dollars of investment, over 20 commercial properties be acquired, continued growth in the population, and increases in retail sale figures. This now provides us another tool in our toolbox to incentivize businesses and individuals to partner in Waterville’s revitalization.”
This fall and winter, CMGC will be holding educational workshops for the public. Details will be posted here as they become available.
Explanation of OZ Tax Incentives
There are three tax incentives associated with the OZ program:
- Temporary Deferral – If invested in a qualified OF, certain realized gains will not be included in gross (taxable) income until the earlier of the following dates: when the OF is disposed; or December 31, 2026.
- Example: An investor rolls over $100 of capital gains into the OF. Taxation on that $100 is deferred until 2026.
- Step-up in Basis – The basis is increased by 10% if capital gains reinvested into an OF are held by the taxpayer for at least 5 years, and increased by an additional 5% if held for at least 7 years. Thus, up to 15% of the original gain is exempt from taxation.
- Example: An investor rolls over $100 of capital gains into the OF. Taxation is deferred on the $100, and the investor pays taxes on only $90 if investment is held for 5<x<7 years, or on only $85 if investment is held 7<x<10 years. Investor also pays capital gains tax on appreciation of the original $100.
- Permanent Exclusion – If an investment in an OF is held for at least 10 years, the gains accrued in that investment (once sold or exchanged) are exempt from taxation.
- Example: An investor rolls over $100 of capital gains into the OF. Taxation is deferred on the $100, and the investor pays taxes on only $85. Investor pays no taxes on appreciation.
On Dec. 31, 2026, the lesser of the following will be recognized:
- The remaining deferred gain (accounting for step-up basis)
- The fair-market value of the investment in the OF