If the program survives, investors and community development leaders will be pushing for changes to improve its effectiveness. Their wish list of programmatic improvements includes the following.
Eliminating the vanishing benefits. The program currently asks investors to make largely illiquid investments in low-income census tracts in exchange for four tax benefits:
- Deferral on recognizing income on qualifying capital gains reinvested in qualified opportunity zone funds until Dec. 31, 2026
- Elimination of 10% of the capital gain liability (through a tax basis step up) if the taxpayer maintains the reinvestment for five years before the end of the gain deferral benefit
- Elimination of an extra 5% of the capital gain liability if the taxpayer maintains the reinvestment for seven years before the end of the gain deferral benefit
- Permanent exclusion of capital gains on the reinvestment if it’s maintained for 10 years
The fixed Dec. 31, 2026, date has unraveled investors’ benefits one-by-one, leaving only the permanent exclusion benefit meaningfully available for investments made closer to the 2026 deadline. Any opportunity zone program extension should ensure every qualified investment realizes the program’s full benefits by tying the date that the gain must be recognized to the date the investment is made, rather than a fixed date.
Illuminating the community benefits. Since its creation, the program has driven an unknown amount of money into low-income census tracts and created an unknown number of jobs because reporting requirements were removed from the final version of the Tax Cuts and Jobs Act.
A letter from the Novogradac Opportunity Zones Working Group noted that, according to the Joint Committee on Taxation, $85 billion of investments have gone into opportunity zones, but the community benefit impacts of the program remain opaque.
There should be reporting requirements on the location of opportunity zone investments, the types of businesses funded, and estimates of the jobs created or preserved—similar to the information reported to the New Markets Tax Credit program. Doing so would strengthen the long-term viability of opportunity zones by giving policymakers clear statistics on the program’s utility and community benefits.
Opening the program to existing business operators. The opportunity zone program currently treats tangible property purchased from a related party or contributed by an investor as a nonqualified property. In doing so, it creates a regulatory hurdle that limits the ability of taxpayers already operating in opportunity zones to participate.
Permitting property that a taxpayer substantially improved, regardless of whether the property was acquired from a related party or contributed by an investor, to qualify would better allow these key community stakeholders to participate in the program.
Clarifying the leasing rules. Under the current regulations, if owning and leasing real property is the “active conduct” of a trade or business, then it’s eligible to be a qualified opportunity zone business.
However, the regulations provide that “merely entering into a triple-net lease with respect to real property” doesn’t constitute an active trade or business, with an example illustrating that a landlord leasing real property to a single tenant under a triple-net lease wouldn’t qualify. The questionable rationale for this rule is that such business activity may be inappropriately passive.
Numerous unanswered questions create significant uncertainty for taxpayers considering investing in potential real estate businesses in opportunity zones. The regulations don’t define a triple-net lease. It’s also unclear whether a business that leases to multiple tenants under triple-net leases would qualify as a sufficiently active business—surely at some point a property owner has enough tenants with triple-net leases to qualify as an active trade or business.
These uncertainties create barriers to participation in the program and reduce potential investments in these communities. Allowing triple-net leasing or, at a minimum, clarifying the rules around multi-tenant triple-net leasing would unlock the program for difficult-to-develop commercial properties in these target communities.
Targeting disaster recovery. Congress created the Gulf Opportunity Zone after Hurricane Katrina to help affected states recover. It helped expedite capital investment into the hardest-hit areas by increasing the number of census tracts eligible for New Markets Tax Credit investments, increasing bonus depreciation, and increasing tax-exempt bond capacity.
The opportunity zone program could be retooled to drive capital to areas under emergency declaration by allowing affected areas to be designated as temporary opportunity zones. This would allow it to be a flexible tool to address the long-term challenges of disaster recovery.
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