There were two parts to setting up the Opportunity Zones Program when it was introduced through the Tax Cuts and Jobs Act of 2017. The first was initiating guidance from both the IRS and U.S. Department of the Treasury. And the second was determining what would constitute appropriate Qualified Opportunity Zones for investment.
To accomplish this, states nominated low-income communities and neighboring areas, based on population tracts issued by the U.S. Census Bureau. Following that, the Treasury Department certified those nominations. These were the geographic areas in which Qualified Opportunity Funds could invest.
But can those Qualified Opportunity Zones be expanded? The answer is “no.” The 8,700 designated low-income and economically distressed neighborhoods and communities can’t be expanded without Congressional approval. Nor can any lower-income neighborhood not included in that original designation qualify as part of the federal Opportunity Zones program (though it might qualify for a specific state program).
Having said that, the Opportunity Zones Transparency, Extension and Improvement Act was introduced in April 2022 to help reform the Opportunity Zones program. As of December 12, 2022, the Senate Committee on Banking, Housing, and the Urban Affairs Subcommittee on Securities, Insurance, and Investment held hearings on the bill. And that’s as far as it got.
According to a recent webinar hosted by OpportunityDb, the bill is in limbo, along with other tax legislation. The webinar experts said that Congress is currently working on the debt ceiling, which means any tax legislation – including that connected to the Opportunity Zones program – is likely to be pushed back to the end of the year.
But even if the bill, as it currently stands, passes without many changes, it won’t expand QOZs. In fact, that bill would require that certain census tracks could be disqualified from Opportunity Zone inclusion. Specifically, qualified census tracts with a median family income at or above 130% of the national median would lose their status as a QOZ.
The only possible expansion of Opportunity Zones (per the updated legislation) might include brownfield industrial sites that were not included in the original program because they had no population.
The only other “extension” mentioned is possibly extending the program from its current conclusion on Dec. 31, 2026 to Dec. 31, 2028. If this change goes into effect, it could allow investors two more years to potentially defer capital gains from the sale of capital assets by investing in a QOF.
But as for physically expanding an Opportunity Zone, the answer is “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. It should also not be construed as advice meeting the particular investment needs of any investor.
Investors in QOFs will need to hold their investments for certain time periods to receive the full QOZ Program tax benefits. A failure to do so may result in the potential tax benefits to the investor being reduced or eliminated.
If a fund fails to meet any of the qualification requirements to be considered a QOF, the anticipated QOZ Program tax benefits may be reduced or eliminated. Furthermore, a fund may fail to qualify as a QOF for non-tax reasons beyond its control, such as financing issues, zoning issues, disputes with co-investors, etc.
Distributions to investors in a QOF may result in a taxable gain to such investors.
The tax treatment of distributions to holders of interests in a QOF are uncertain, including whether distributions impact the aforementioned QOZ Program tax benefits.
A QOF must make investments in Qualified Opportunity Zones, which carries the inherent risk associated with investing in economically depressed areas.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
