How Sen. Tim Scott envisioned Opportunity Zones working for low-income communities
When U.S. Sen. Tim Scott described his vision for federal tax breaks in low-income areas, he spoke candidly of his childhood growing up in impoverished neighborhoods in North Charleston — neighborhoods such as Liberty Hill and Union Heights, which still lack basic needs like grocery stores.
The Republican lawmaker saw tax breaks tailored to businesses and investors as a fruitful way to benefit both investors and low-income communities.
He called these areas “Opportunity Zones,” and was able to squeeze the associated tax breaks into the new federal tax rewrite, which went into effect earlier this year.
“I’m focused on kids who remind me of myself, whether you’re rural South Carolina or the inner city of South Carolina,” Scott said in March.
About six months later, developers, investors, local governments and residents of the low-income tracts selected by Gov. Henry McMaster are still asking the question: “How exactly will this all work?”
A few things are clear. The tax breaks are specific to “capital gains,” a form of revenue from real estate deals or stock transactions. For example, someone who bought $10,000 of stock in a company, and later sold it for $15,000, would have a $5,000 capital gain. The same could be true, on a much larger scale, for a real estate development company that sold a shopping center or apartment complex.
Investors can invest those capital gains into an “Opportunity Fund,” and avoid paying taxes on the capital gains until 2026. In addition, investors can get a discount of up to 15 percent on these taxes when they eventually pay them. What’s more, capital gains from qualified Opportunity Zone investments held for at least 10 years won’t be taxed at all.
In an explainer video from the McNair Law Firm, attorney George Morrison said that anybody with capital gains, no matter the amount, can create an opportunity fund.
“Unfortunately, we don’t have the regulations yet,” he said, adding that people need to be “ready to strike at a moment’s notice” when regulations are announced.
The rules governing the relationship between investors and residents of the selected low-income communities — a relationship Scott championed as a benefit of the tax break — are still not clear.
Sen. Cory Booker, D-New Jersey, joined Scott in supporting Opportunity Zones. He has urged the U.S. Treasury Department to act soon to create stringent regulations for investors seeking tax breaks that would mandate things such as the creation of affordable housing in Opportunity Zones.
“If the Treasury Department’s regulations are not thoughtfully and properly designed, the program could be twisted to provide little more than a tax shelter for areas or projects that the legislation was not meant to support,” Booker wrote in an open letter to the department.