When legendary newspaperman Horace Greeley implored Americans to “go West” to find opportunity, he wasn’t talking specifically about Missoula. But his words still apply to the Garden City, thanks to a new program.
In Missoula’s Westside and Northside neighborhoods, developers and investors can now get big tax breaks by building or financing housing or commercial projects due to a new tax law provision called Opportunity Zones.
Opportunity Zones were created as part of the federal Investing Opportunity Act of 2017, and thousands of “economically distressed” areas across the United States were designated, including one in Missoula. The goal is to create an incentive for private investors to revitalize these economically slow-growing areas.
Already, local businessman Harry Ward has big plans to take advantage of the “O-Zone." Ward owns Zimorino’s Pizza, Kayle food delivery, Kayle distributing and several buildings on the Westside. He’s setting up an Opportunity Fund and plans to attract investors and make improvements to his businesses, such as a new customer seating area for Zimorino’s.
“Really it just boils down to 'Hey, did you just make a bunch of money selling a commercial building or did you just sell a bunch of stock?' If you took (money) out of the stock market and put it in an Opportunity Zone, you can make more money in the Opportunity Zone than you can in the stock market with less tax consequences,” Ward explained.
Taxpayers who invest inside these zones are eligible to benefit from capital gains tax incentives. In essence, many U.S. investors and corporations have unrealized capital gains in stocks and funds, estimated by the IRS to be a combined $6.1 trillion. Many investors are reluctant to pull their money out of funds and stocks and invest in commercial and housing projects because they would have to pay large capital gains taxes.
But the new Opportunity Zones legislation allows them to defer a significant portion of that tax if they invest inside the zones. The money has to first flow through an Opportunity Fund, the kind that Ward is setting up. Investors can sell property or equity (real estate sold doesn’t have to be in an Opp-Zone) and invest in any Opportunity Fund they want.
“Whether I take my own investment or other people who have a need to invest in an Opportunity Fund can actually invest in my fund,” Ward said. “It really gives you carte blanche to get some people who can utilize capital gain money like stock money or real estate sale money and have someone who knows what they’re doing improve an area that needs it.”
Ward points to the area where West Broadway meets Russell Street. It’s full of aging buildings that could be replaced with new businesses or housing that would contribute more to the local economy and local tax base.
“It’s going to increase property values in this area,” he said.
A Missoula Democratic legislator, Rep. Connie Keogh, has introduced a bill that would align Montana tax laws with the federal law. Currently, House Bill 458 is being considered in the House Taxation Committee.
Brent Campbell, the president and CEO of land-use planning and design firm WGM Group in Missoula, believes Opportunity Zones will be of “significant economic development value to communities, and directly to individuals who have considerable capital gains issues.”
“Given that this will be deferral of gains on equities and/or real-estate, we think there will be substantial deal flow created by the Opportunity Zones across the state,” he said. “We believe this can be a major driver of investment and economic development in these zones.”
Campbell believes that the new law will help not only wealthy corporate investors but also working-class Montanans.
“If somebody sells a ranch in eastern Montana, and they’re going to have a big capital gain, they could invest that money in an Opportunity Zone and build apartments,” he explained. “That way, they defer the capital gains from the sale of the ranch for everything they put into the apartments.”
If the investment in the Opportunity Zone is held for longer than five years, the investor only has to pay 90 percent of the deferred capital gain. If they hold it for more than seven years, the investor only has to pay 85 percent of the deferred capital gain. There are additional benefits to holding on for over a decade.
“It’s putting that cash to work,” Campbell explained. “It allows an entrepreneur who maybe has a startup company with some valuable potential assets to sell some stock, not pay capital gains taxes and put it into a new building for the business. It doesn’t have to be the sale of property, it can be the sale of equities.”
Keogh said she introduced the bill because state tax code doesn’t completely line up with the federal code.
“When Montanans invest in an Opportunity Fund, this law would allow them to defer state income tax,” she explained. “I’m providing a bill to entice Montanans to invest in 26 areas across the state. It’ll provide additional tax deferral.”
Keogh said the law would be good for communities like Missoula because it will encourage economic revitalization.
“It’s going to create infrastructure on jobs and then the communities will receive more property tax revenue from those developments,” she said. “And also communities will receive more income tax from more jobs being created. So it’s going to improve the health of many of these communities.”
The Opportunity Zone in Missoula includes the West Broadway corridor all the way to the north bank of the Clark Fork River from St. Patrick Hospital to Reserve Street. It also includes the area from Mullan Road to Interstate 90. The entire Westside and Northside neighborhoods are included, as is the industrial zone west of Scott Street and north of the railroad tracks.
Campbell said he’s already had investors and developers asking him about the Missoula zone and the new tax code.
“It’s got a lot of attention,” he said. “People are forming these Opportunity Zone Funds and looking at investment opportunities.”
For more information and a map of all Opportunity Zones, visit irs.gov/newsroom/opportunity-zones-frequently-asked-questions.