Intersection of Current Tax Legislation and Opportunity Zones?

We previously wrote about proposed legislation which would extend the opportunity zone (“OZ”) tax incentive. First introduced in April 2022, the September 2023 version of the OZ bill provided several policy enhancements to the incentive. However, as Congress weighs current tax legislation carrying a price tag of $79 billion, inclusion of additional tax benefits from these existing OZ proposals remains uncertain.

Believed by many to have catalyzed development in many targeted geographical areas, the OZ incentive has not been without scrutiny. (See our previous posts concerning inquiries by the Senate and targeted IRS enforcement activities.) Despite these political headwinds, many outlets have reported on communities across the country benefitting from significant capital invested into their local economies, particularly in housing. One such estimate indicates that in 2023, 20% of all new apartment units were in an opportunity zone ⁽¹⁾.

Increased transparency is needed to highlight communities that have been positively affected by the OZ incentive. Additional information disclosure requirements, strict penalties for noncompliance, and a new IRS public reporting requirement in the proposed OZ legislation would help Congress more accurately take stock of the program’s success by measuring key statistics about OZ projects.

Broadly speaking, project delays caused by the Covid 19 pandemic, the subsequent period of rapid inflation, and the tightening of both the capital and debt markets that followed, have resulted in a slowdown of capital investment into OZ’s. While delays from these economic factors have been a setback for stakeholders, the two-year extension in the proposed OZ legislation would allow communities the much-needed time to re-establish their development goals and secure appropriate capitalization.

The ultimate fate of the OZ incentive is unclear, but its perceived successes might have a chance to continue if existing OZ proposals are enacted into law. The conundrum is whether Congress will take action to extend and expand the program amid existing scrutiny – or whether the investment community will continue to embrace the incentive before its expiration in 2026.

CLA’s OZ Working Group is closely monitoring tax policy and will provide updates as new information becomes available. We serve many OZ stakeholders including investors, fund sponsors, and project developers, and we can help you navigate the political uncertainty surrounding opportunity zones.

We, as a real estate community, need to be more proactive with our political leaders and representatives. While there has been a lot of positive impact driven by OZ-led projects, abuses of the incentive (either actual or perceived), are what seem to capture media headlines and the attention of lawmakers. More stories should be shared highlighting how the OZ program has benefitted the people and businesses in our local communities.

Sources:
⁽¹⁾ Economic Innovation Group