By Anayat Durrani
The Opportunity Zones program was started under the Trump administration, created under the 2017 Tax Cuts and Jobs Act, and was since heralded as a means for spurring investment in economically distressed areas of the country. On the campaign trail, President Biden vowed to overhaul Opportunity Zones but since in office has not yet settled on how or what kinds of changes would be made to improve the program.
“I think the OZ program will do fine and may even get surprising support under the Biden Administration,” says Joseph B Darby III, tax attorney and founder of Joseph Darby Law PC.
Darby notes that the OZ program was one of the very few sections of the 2017 Tax Act that had true bi-partisan support. He says the fact that it targets investment in low-income areas made it a more natural program to get democratic backing.
“The only reason Democrats ever seemed to have ambivalence about the OZ program is because Trump touted it strongly, but now that Trump is out of the picture the news is spreading that the OZ incentives do push investment capital into low-income areas where the capital would not go but for the OZ incentives,” says Darby.
There are currently more than 8,700 Opportunity Zones designated nationwide. By the close of 2019, Opportunity Zone funds collected more than $75 billion in private capital for various real estate projects.
Blake Christian, a tax CPA for Holthouse Carlin and Van Trigt (HCVT), says the OZ program architects developed the program’s framework years earlier with support from the Obama-Biden Administration, outlined in a 2015 report by the Economic Innovation Group, “Unlocking Private Capital to Facilitate Economic Growth in Distressed Areas.
Though there’s been little movement on the OZ front, the Biden administration has recognized the OZ program as means to help bring forth economic and racial equality.
“President Biden and Vice President Harris have expressed support for the program’s ability to stimulate both real estate development and operating businesses,” says Christian. “The OZ program is also an excellent match with President Biden’s Build Back Better program and Public-Private Partnerships are becoming more common-place as the OZ program evolves.”
Outlook of the Opportunity Zone program
Paul Getty, CEO of First Guardian Group, and licensed real estate broker/investment advisor says OZ programs have good bi-partisan support and there has been no discussion of reducing or eliminating them. He says the Biden administration is more focused on passing infrastructure legislation and that OZ changes do not appear to be a current priority.
“Until infrastructure legislation is passed, we do not anticipate any changes in OZ legislation,” says Getty. “Look for greater reporting and accountability requirements to be added after infrastructure legislation is passed.”
Though the OZ program has received some criticism, Christian says in general both parties seem to support the program in relation to housing development, business start-ups and job creation.
Over the past 18 months, he says the Biden Administration has made it clear they would like to see three improvements to the program: increased annual reporting by OZ funds to disclose more details regarding OZ projects, job creation, community impact, etc.; evaluation of positive impact on the residents in OZ census tracts; and partnering of OZ Funds with non-profits in the OZ census tracts.
The introduction of two pieces of legislation also appear promising for the OZ program. Bipartisan Representatives Tim Burchett (TN-02) and Henry Cuellar (TX-28) introduced legislation called Opportunity Zone Extension Act of 2021 and Representatives Michelle Steel (R-CA), Burgess Owens (R-UT), María Salazar (R-FL), and Carlos Giménez (R-FL) introduced the Growth and Opportunity Act (H.R. 4608) to extend the deadline for reinvesting gains from December 31, 2026 to December 31, 2028.
“Such an extension, which has had bi-partisan support over the past two years, will further benefit investors because a QOF investment funded by December 31, 2021, will have the opportunity to meet the seven-year holding period by the December 31, 2028 recognition date – thereby receiving the full 15% basis step-up,” says Christian. “The Burgess Bill would also allow new OZ census tracts to be designated every 10 years, dramatically extending the program.”
Biden Administration’s proposed tax increases
Getty says the Biden administration appears to favor tax increases rather than providing tax incentives “and there is a perception that OZ investments favor more affluent investors and that OZ projects have done little for many rural and low income areas.”
“With capital gains rates likely to spike for well-heeled investors in 2022, the Opportunity Zone program is seeing a flood of last-minute activity from both real-estate and non-real estate investors who have gains to defer,” says Christian.
The House Ways and Means Committee released legislative text on September 13, that contained numerous tax change proposals targeting high-net-worth (HNW) individuals.
“To start, short-term capital gains are subjected to ordinary tax rates which could be headed back to 39.6%. After factoring in the Net Investment Income Tax of 3.8%, some well-heeled investors could be looking at a combined 43.4% - plus another 3% for taxpayers with incomes in excess of $5 million, bringing them to 46.4%--almost half of their gains,” says Christian.
Meanwhile, he says the federal long-term capital gains rate would go up to 25%, plus the net investment income tax of 3.8%. He says HNW individuals could be seeing rates of 28.8%, and for incomes over $5 million, the tax rate would raise an additional 3%.
“Therefore, we could see short-term gains taxed at 46.4% and long-term gains at up to a 31.8% for individuals, thus making Opportunity Zone investing even more valuable for deferring and/or eliminating capital gains,” says Christian.
Growing impact and trends of Opportunity Zone investments
Opportunity Zones can be an effective tool for economic resiliency and recovery—and investors are central to the viability of the OZ program.
“I have clients putting literally hundreds of millions of dollars into Opportunity Zones and there is no doubt that this investment provides the economic and social benefits envisioned by the legislation, including construction jobs and other good work, creating new or substantially improved buildings that improve dramatically the quality of neighborhoods and bring new businesses into areas that would not attract these new businesses except for the OZ incentives,” says Darby.
Darby says the capital investment map is more diversified as a result of the OZ tax incentives and that diversity is good for everyone. Christian notes that the program has evolved over the past three and half years and that there are more operating businesses and even venture capital incubators utilizing the OZ program structure.
“Real estate projects are still the dominant investment choice for OZ investors, however, solar projects, tech, bio-tech, pharma and manufacturing companies are becoming more commonplace,” says Christian.
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