A new White House under President Biden is causing the Opportunity Zone (OZ) development community to debate and wonder about the future of the Trump-era tax incentive program.

Throughout 2021, the president, intent on funding his administration’s ambitious government spending initiatives, has proposed various tax increases to realize them, including hikes on income and capital gains under his American Families Plan first announced in April.

Biden’s latest announcement came May 28 under his proposed 2022 fiscal year budget, which calls for a capital gains tax as high as 43.4%. The rate would only affect taxpayers earning more than $1 million in a year.

What is expected to happen in the Opportunity Zones if the capital gains rate is increased?

Biden made clear during his campaign last year that he wanted to reform the OZ program, one of the signature components of President Trump’s Tax Cuts and Jobs Act of 2017. The program promises capital gains reductions for investment in the low-income OZ tracts spread throughout the U.S. The program’s intent was to encourage private investment in poor areas.

Matthew Rappaport, a tax lawyer with New York-based Falcon Rappaport & Berkman PLLC, said he sees some positives ahead under the new president.

“I believe that the program will benefit if the Biden administration successfully pushes a marginal rate increase on the capital gains tax through congress,” he said. “Deferral would be more valuable for two reasons: First, you’re investing even more pre-tax money than you would under lower rates; and second, the virtual interest-free loan from the government is worth more.”

Rappaport added that no one should be “sleeping on the idea of Section 1031 getting limited or repealed, opening up more capital to OZ investing.”

Reforming the Opportunity Zone program

The Biden campaign proposed incentivizing Qualified Opportunity Funds, an investment vehicle under the OZ program, to partner with nonprofits and others to create jobs for low-income residents in the zones. Biden also called for improved transparency measures by forcing OZ tax break recipients to provide more detailed reporting on their investments’ local impacts.

Many in the OZ community, while clearly concerned about tax increases, have also called on Biden to reform the program.

Peter McNeil, a CPA with Comprehensive Financial Solutions & Tax in Manhattan Beach, Calif., noted that the OZ program’s biggest tax benefit is that “any capital gain on the investment held for 10 years will be tax-free, not just deferred. There is nothing currently in the Biden proposal that attacks this.”

McNeil sees the math this way: The high-income taxpayer picks up the deferred gain at 35% (a gain after basis step up) after a deferral of 20%. The 15% difference is due on April 15, 2027.

“That extra 15% tax on the deferral is like taking a loan at under 3% a year,” he noted.

Professionals anticipate that the OZ program is here to stay

Bradford Cohen, a partner at Jeffer Mangels Butler & Mitchell LLP in Los Angeles, predicted a cooling-off period of the OZ program for the remainder of 2021 under President Biden.

“On a positive note, in the unlikely event that Biden’s proposal to eliminate the income step-up in basis of assets held at death is enacted, the OZ program would provide taxpayers with a substantial unique step-up in basis after the 10-year period,” he added.

Cohen also said he does not foresee the Biden administration getting rid of the OZ program, though.

“I feel that it’s here to stay,” Cohen added, “with the possibility of Treasury cleaning it up to ensure that more benefits accrue to residents, tenants, and shop owners located in the zones.”


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