Washington Gov. Bob Ferguson has nominated 99 census tracts containing low-income and rural communities to partake in the federal Opportunity Zones (OZ) 2.0 program.
The theory behind the OZ program is that providing capital gains tax abatement incentives will help encourage development in economically distressed areas. Approved OZs will last 10 years, starting on Jan. 1. The Department of Housing and Urban Development (HUD) believes it will select approximately 6,500 census tracts nationwide.
Gov. Ferguson’s selections represent 27 counties and 17 tribal lands in total. The final 99 tracts were distilled from an original 152 application pool, with 36 OZs containing rural communities. The designations include:
- King County – 25 nominated census tracts.
- Pierce County – nine nominated census tracts.
- Spokane County – nine nominated census tracts.
- Snohomish County – seven nominated census tracts.
- Kittitas County – five nominated census tracts.
- Yakima County – five nominated census tracts.
- Clark County – four nominated census tracts.
- Thurston County – four nominated census tracts.
- Clallam County – three nominated census tracts.
- Kitsap County – three nominated census tracts.
Adams, Jefferson, Klickitat, Pacific, Pend Oreille, Walla Walla, Whatcom and Whitman counties received two nominations each.
Benton, Ferry, Grant, Grays Harbor, Lewis, Mason, Okanogan, Skagit and Stevens counties received one nomination each.
The bulk of the tracts are centered around the state’s most densely populated regions, particularly around the Seattle area. The nominations highlight investment potential targeting industrial job hubs, mixed-use and affordable living, transit-oriented development and other economically significant opportunities.
OZ 1.0 was launched in 2017 as a one-time excursion with plans to conclude after a decade. However, the program proved to be a massive success, driving around $75 billion in capital gains in OZs between 2017 and 2024. The results spurred the federal government to adopt it as a permanent program, solidifying its presence as a federal fixture in the Big Beautiful Bill.
Going forward, states will have the opportunity to nominate new designations every 10 years. The U.S. Treasury Department has been tasked with reviewing all nationwide nominations. The first round of certifications is expected to be announced on Nov. 28.
Governors are allowed to nominate up to 25 percent of eligible census tracts to be included in the program. Eligible tracts must have a median family income (MFI) less than 70 percent of state or metro MFI. Alternatively, they must have a poverty rate greater than or equal to 20 percent and MFI less than or equal to 125 percent of state or metro MFI.
The program includes a standard five-year deferral plus 10 percent basis step-up for all investors. As part of the program, investors are allowed to defer percentages of their taxes based on prior gains. If those investments are located in OZs and held for five years, the government will eliminate 10 percent of taxes on gains from investments. Holding the investments for seven years increases that amount by another 5 percent.
The government made several notable changes between the program’s first and second iterations. These include the removal of the Contiguous Tract Rule, which allowed designation of tracts next or adjacent to other qualifying tracts. Qualified Rural Opportunity Fund investments also have new criteria to be received. Now developers in rural areas only need to add an additional 50 percent in substantial improvements for properties at acquisition to qualify as an OZ.
Rural areas will also be offered a 30 percent step-up in basis after the 10-year period, building on the reduced substantial improvement threshold. OZ 2.0 will also detail which tracts are OZ rural areas. These are defined as any area outside of a municipality that has a population greater than 50,000 and any urbanized area contiguous and adjacent to a city or town.
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