Can a State Change its Opportunity Zone Designation?

Can a State Change its Opportunity Zone Designation?

Posted by on Aug 30, 2021

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This is a loaded question since there are a few questions being asked. First, can an opportunity zone (OZ) change its entire designation, and then can it change only parts of it? Let's dig deeper into what these questions mean, if they are possible, and finally, how to go about implementing the changes.


Why Change an Opportunity Zone’s Designation?

Before we answer if an OZ can change its designation, let's look at why one might want to?

There’s little to no information about a state requesting to change its OZ designation. That makes sense, given how new the OZ program is.

When an eligible tract is designated as a qualified OZ, its size or boundaries are based on the population of the people within the tract. The boundaries may change as the population grows and shrinks. Currently, this is the only designation change we are aware of that might occur. We aren't aware of any states removing tracts from the OZ program.

Changing an OZ Designation

If we go with the above information as a change in OZ designation, it then boils down to changing the boundaries or size of the OZ tract. So the question becomes, can a state change the boundary of its OZ tracts? 

Again, we aren’t aware of a state requesting to do this. It is the state governors who nominate zones/tracts into the OZ program. Then the U.S. Department of the Treasury officially designates them. Since the original designations, there haven't been any change requests.

The IRS controls changes to OZ boundaries. On May 14, 2020, the IRS announced that designated qualified OZ boundaries established in 2020 are not subject to change. It isn't clear how a governor might get around that announcement or if they can.

The inability to change OZ designations is related to Section 1400Z-1. Section 1400Z-1 does not allow qualified OZs to be nominated or designated after ​​statutory deadlines. Post-designation changes to the boundaries are also not permitted.

Additional language from Section 1400Z-1 makes it clear that changes in OZ designations are now allowed:

The boundaries of the Designated QOZs were established at the time they were designated and are not subject to change. Accordingly, boundaries of a Designated QOZ do not shrink or expand if the 2020 decennial census results in a change to the boundaries of a census tract.

From this, we can see that the IRS does not allow changes to OZ designations. To answer our question, can a state change an OZ designation, whether that means removing a tract from the OZ program or changing its boundaries — the answer appears to be a firm "no."

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.

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