First introduced as part of the 2017 Tax Cuts and Jobs Act, the Opportunity Zone (OZ) program is no longer in its infancy. With some of the initial buzz wearing off, are OZ investments still worth considering? Here we explore why now is a great time—perhaps better than ever—to consider an OZ investment.
Tick tock: Timing is everything
Many experts consider the OZ tax incentive a once-in-a-lifetime opportunity—but it won’t last forever. In fact, a key expiration date for current OZ legislation is coming up soon: Taxpayers can only defer tax on eligible gains they invest in a Qualified Opportunity Fund (QOF) until December 31, 2026. In most cases, the tax payment for the eligible gain would be due in 2027 when the taxpayer files a return. It’s possible that new legislation could extend the year-end 2026 deadline; see below.
The chance to invest eligible gains in a QOF—and therefore defer tax payment on the gains—is especially relevant in today’s market environment, where many investors may be harvesting gains in the stock market or rebalancing portfolios after recent highs. While it’s true that taxpayers who acted earlier will enjoy a longer period of tax deferral (and a step-up in tax basis on deferred gains if they invested before December 31, 2021), the opportunity to defer payment until filing in 2027 is still very much worth considering today.
Savvy investors also appreciate the long-term benefits of the OZ program—and many consider the long-term incentives to be even more compelling than short-term tax deferral. If a taxpayer holds their investment in a QOF for at least 10 years, they may be able to permanently exclude the gain resulting from a qualifying investment when it is sold or exchanged. The exclusion happens if the taxpayer elects to increase the basis of their QOF investment to fair market value on the date of the sale or exchange. The current OZ program isn’t set to sunset until 2047, giving investors with long time horizons many years to let their QOF investments grow.
Key facts and figures
- QOFs tracked by Novogradac reported they raised $3.5 billion in equity in 2023 (+10% year-over-year), increasing the total amount of equity raised to $37.6 billion[1]
- Residential development continues to be the leading area of investment, with commercial development second[2]
- By 2020—just a few years into the program—OZ investment dollars had reached approximately 3,800 communities, representing nearly half of the total number of designated OZ communities nationwide, demonstrating enormous geographic reach[3]
- Communities receiving OZ investment have some of the highest need, with the average OZ that has received investment ranking in the 87th percentile for poverty, 81st for median household income, and 80th for unemployment[4]
Looking ahead: Legislation to extend OZ program?
In September 2023, Rep. Mike Kelly (R-PA) and a bipartisan group of co-sponsors introduced the Opportunity Zones Transparency, Extension, and Improvement Act (H.R. 5761). Similar to a bicameral bill introduced during the previous session of Congress, this one would require additional data reporting to increase transparency as well as extend the investment and deferral window to the end of 2028.[5] Many commentators view a second Trump term and a Republican majority in Congress as an election outcome that will favor extension and renewal of Opportunity Zones. In sum, as the current legislation’s year-end 2026 deadline draws near, investors would be well served to consider the benefits of near-term tax deferral and long-term tax-free growth of a QOF investment.
[1] Novogradac, “QOFs Report $3.53 Billion Jump in 2023 Equity, Moving Total Beyond $37 Billion”, John Sciarretti, February 6, 2024, https://www.novoco.com/notes-from-novogradac/qofs-report-353-billion-jump-in-2023-equity-moving-total-beyond-37-billion
[2] Ibid.
[3] Economic Innovation Group, “Examining the Latest Multi-Year Evidence on the Scale and Effects of Opportunity Zone Investment”, Kenan Fikri, August Benzow, and John Lettieri, March 22, 2023, https://eig.org/opportunity-zones-brief-2023/, based on U.S. Department of Treasury research paper by David Coyne and Craig Johnson (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4308263) and Harrison Wheeler working paper (https://www.dropbox.com/scl/fi/ztnak1597u7nc17s9xwac/OZPolicy.pdf?rlkey=2wsbnc9xmw97l1pqqin117cfd&dl=0)
[4] Ibid.
[5] Press release, “Reps. Kelly, Kildee, Miller, Sewell reintroduce Opportunity Zones Transparency, Extension, and Improvement Act”, September 29, 2023, https://kelly.house.gov/media/press-releases/reps-kelly-kildee-miller-sewell-reintroduce-opportunity-zones-transparency
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