I'd expect that, in general, an increase in the tax rate on long-term capital gains would make OZ investments more attractive-- a higher tax rate means that greater amounts of taxes will be deferred/excluded under the OZ regime. The exception is for investors who are currently deciding whether to invest 2020 or 2021 gains into QOFs. They could essentially be deferring capital gains that otherwise would be taxed at a 20% federal rate to a year when they are subject to a 39.6% rate (unless, of course, the tax rate increase is retroactive to the beginning of 2021). Even so, they may decide that the benefit from the 10-year gain exclusion is worth this cost. In addition, the question for investors already in QOFs is whether to trigger an inclusion event to recognize the invested gains at existing rates (assuming no retroactive change). Not all inclusion events involve a disposition of the QOF or its assets, so this effect may not depress the market for OZ investments. Bottom line: Biden's higher tax rates will boost OZ investment attractiveness after they are enacted, but will create uncertainty until they are.
