Opportunity zones (OZs) were created by the Tax Cuts and Jobs Act of 2017 and designed primarily to foster economic redevelopment in impoverished areas across the United States. OZs offer investors a significant incentive to invest in these neighborhoods: defer capital gains taxes or, if held for 10 years, eliminate most if not all of the tax. Both the tax deferral aspects and the potential tax-free nature of the investments together make the OZ program particularly attractive.
On Sept. 28, 2023, U.S. representatives Mike Kelly (R-PA), chairman of the Ways and Means Subcommittee on Tax, along with Dan Kildee (D-MI), Carol Miller (R-WV), and Terri Sewell (D-AL), introduced H.R. 5761, the Opportunity Zones Transparency, Extension and Improvement Act. An updated version of the 2022 original bill, this bipartisan group of leaders is seeking to enhance the opportunity zone program by extending the deferral period and strengthening the reporting requirements of the program.
THE OZ RECORD
Many observers agree that the current OZ program has been successful in many ways. Reports of the program reveal that, in the first three years of the OZ program (through 2020), $50 billion in equity has been invested across 48 percent of the qualified opportunity zones, wildly exceeding the expectations that it would take 10 years to reach that level of investment.
Also encouraging, OZs rents remained stable and have not shot up as in many other parts of the country, keeping real estate projects in many low-income communities affordable.
Spurring further investments into projects such as affordable housing and commercial building in low-income places nationwide remains the primary goal of the OZ program and H.R. 5761.
PROPOSED OZ REVISIONS
Extend the deferral period. Investors would have an extra two years (until Dec. 31, 2028) to defer capital gains taxes, thereby extending the program for two years. Importantly, this means the legislation also pushes step-up basis out two years, enabling new investors to participate and be fully eligible for tax benefits of the OZ program. Perhaps not coincidentally, it took two years for the final regulations to be issued by the U.S. Department of the Treasury, effectively stalling the program by that same amount of time.
Reinstate and expand reporting requirements. Investors would have to file new versions of Forms 8996 and 8997, intended to enable Congress to better evaluate the effectiveness of the OZ program over the long term. This transparency is crucial: It enables stakeholders to collect data on the economic performance, employment, property values and other items to better analyze results and compare relative successes of the different communities in which investments have been made.
Sunset certain opportunity zones. Most of the census tracts that were designated as opportunity zones are impoverished and the types of communities where Congress intended to drive investment. Some were not, however, and to ensure under-
developed communities remain the focus, the bill would sunset the opportunity zone designation for any tracts with a median family income at or above 130 percent of the national average. States would be able to replace the sunset zones one-for-one with eligible high-need communities.
Enable small investors to participate. Currently, OZ participants can only invest directly in properties, but not in other funds that are involved in opportunity zones. H.R. 5761 changes this by permitting “fund of funds” structures. The benefit of this change is to create potentially even greater pools of funds to be invested in communities and projects around the country.
This article was contributed by the ADISA government relations team.