Developers and investors — even relatively small savers looking to invest stock-market gains or the proceeds of a small-business sale tax free — could qualify for federal tax breaks by backing projects in some of Philadelphia's hottest neighborhoods, thanks to a program that's part of last winter's Trump tax cuts.
The federal Qualified Opportunity Funds and Opportunity Zones programs, like previous "opportunity zone" efforts, are designed to offer tax incentives for people willing to build in depressed areas.
But in this case, timing has led to surprises. Boundaries for the new targeted neighborhoods — reflecting data from the 2010 U.S. Census, which was recorded during the recession of the late 2000s — include places where many Philadelphians have already been eagerly building for the last several years, says Jane Scaccetti, partner in the Philadelphia tax accounting firm Drucker & Scaccetti.
"A lot of the zones [singled out for tax breaks] are in areas we no longer think are edgy — Northern Liberties, Temple University, Schuylkill Yards," Scaccetti said.
In addition, local political and business leaders were able to recommend tracts to be included on the government's list.
Maps of the zones also show the government is targeting Point Breeze, one of the fastest-gentrifying neighborhoods in the city; parts of Kensington and other river wards in Northeast Philadelphia, some of which have attracted an influx of restaurants, brewers, and other specialized businesses; tracts in Germantown and East Mount Airy; and West Philly neighborhoods bordering Drexel and the University of Pennsylvania.
Outside the city, zones include a stretch of Baltimore Pike and the Chester-Marcus Hook corridor in Delaware County, as well as small cities or industrial boroughs such as Coatesville, Burlington, Browns Mills, Camden, Carneys Point, Glassboro, and Pennsauken. Delaware is in the mix with New Castle, Newark, and Wilmington.
The zones also include a tract that's home to the president's Trump National Golf Club Philadelphia, in Pine Hill, Camden County, as my colleague Jacob Adelman reported.
Unlike venture capital and other private investments typically restricted to large or wealthy investors, accountants say provisions of the tax law can open the zone program to publicly-traded investment funds organized by Wall Street banks, brokerages, and investment companies that want to offer investors alternatives to regulated securities markets. Accountants see signs that major banks are taking steps to put such funds together and market them to the public.
"Any individuals who have substantial capital gains — from real estate or stocks or the sale of a business" — will be able to qualify for the tax breaks if they invest in zone funds, Scaccetti added. "Someone who wants to expand a high-tech business in Northern Liberties, they would qualify."
The zones apply to investments from now through 2026, but once those investments are made, the tax benefits appear set to continue for years afterward, said Christopher Catarino, a partner at Scaccetti's firm.
The programs aren't just about boosting profits, according to Catarino. He cited Stull Investment Co., in Center City, and Shift Capital, in Juniata Park, as being among the "developers with a social conscience" who have asked about the program. Both firms are looking to build city projects using zone tax benefits to add low-rent, smart-building or energy-saving features that would otherwise be hard to afford. "They want to use their dollars in a meaningful way to change neighborhoods," Catarino said.
The program takes up what Catarino called six "buried" pages — Sections 1400Z-1 and -Z-2 — in Trump's mammoth Tax Cuts and Jobs Act of 2017. Catarino said the law shows signs of haste — the provisions are "so obscure they didn't even get their own section number" — and appear to match a proposal by the previous Obama administration, whose other initiatives Trump has often sought to bury.
Unlike previous tax incentives, which require extensive government approvals "and traditionally accrue benefits only to major banks and developers," the new zones program "is widely available to the public," Catarino and fellow CPA Steve Rossman tell investors in a guide they have prepared on the program.
The tax breaks include:
Deferral of gains on money invested in one of the zones "until the investment is sold," for investments between now and the end of 2026.
Partial forgiveness of that gain once the deferral ends: 10 percent if the investment is held for five years, up to complete "tax-free appreciation" if the investment is held for at least ten years.
There are other conditions, but not many and they are not difficult to meet, said Catarino, who recommended talking to an accountant.
To qualify, the money must come, for example, from taxable gains on the sale of stock or of a small business.
Investments in existing apartments and other rental properties — favorite investments in Philadelphia — "likely won't qualify for tax benefits," Catarino warned, unless you spend more on improvements than the property cost. "The goal of the program is to improve these areas."
By contrast, large rehab programs and new construction projects in the zones "are home runs" if you can wait ten years to cash in gains tax-free, Catarino said. You can't invest directly — you need to set up a Qualified Opportunity Fund — but you only need one partner to set one up.
Investments in new businesses in the zones also qualify.
I'm worried about this program and other programs that seem too easy: Won't unscrupulous investment salespeople push easily-influenced retirees to bet big on local real estate development that may or may not be profitable after five or ten years?
"We are not suggesting you take your stock gains and reinvest them all" in zone investments, Catarino said. "If your investment advisers are recommending diversification, this may be something to seriously consider."