Opportunity Zones (OZs) and their tax incentives haven’t been getting much notice these days in either business or legal media. If pending legislation passes, this will likely change and bring new attention to this development tool.
The Status Quo
Absent applicable statutes being amended, the benefit of reducing capital gains taxes – on account of the sale of the assets generating the gain invested in the opportunity zone property or business – has timed out. However, the most advantageous benefit enjoyed by OZ investors remains for investments made prior to December 31, 2026. This benefit allows investors who invest before that date and hold their investment at least 10 years before it is sold to avoid capital gains taxes on the sale of their qualified investment. Deferral of the time when capital gains taxes must be paid on the invested gain also remains as a benefit, with the deferral expiring as of December 31, 2026; i.e., the tax bill will be computed on the investor’s 2026 return, and must be paid in 2027.
Possible Changes
Bipartisan legislation has been introduced to amend the existing OZ statutes in several respects. It will extend the December 31, 2026 expiration date by two years; in this case, the tax bill on the invested gain will be postponed two years and the time period to make new investments extended two years. Another proposed investor-friendly change is to permit Qualified Opportunity Funds to be organized as so called “funds of funds,” thereby allowing both investor diversification and investments in smaller communities.
Two other proposed changes are designed to address criticisms about Opportunity Zones that have been made by members of Congress and others. Critics of Opportunity Zones have accurately noted that some relatively wealthy areas have been designated as OZs, whereas the intent of the OZ legislation is to promote development and other business activities in low income areas. The legislation would sunset OZ designations for tracts with median family income (MFI) at or above 130% of the national MFI. States may designate new tracts to replace those that are sunsetted. Another change would impose reporting requirements to enhance the ability of Congress and others to make determinations with respect to whether the Opportunity Zone legislation is having the positive outcomes that its proponents hoped would materialize.
While OZs appear to continue to enjoy bipartisan support, 2024’s political turbulence makes it quite difficult to predict whether the proposed legislation will be enacted.[1]
[1] The proposed amendments are set forth in H.R. 5761 introduced on September 27, 2023, which was referred to the House Committee on Ways and Means. The title of the proposed legislation is Opportunity Zones Transparency, Extension, and Improvement Act.
