Housing Advocates Look to Extend Opportunity Zones Program

Members of a Novogradac working group are hopeful that the Opportunity Zones (OZ) program will be extended and enhanced by incoming secretaries of the Treasury and the Department of Housing and Urban Development (HUD).

The program, launched during the first Trump administration, is set to expire on Dec. 31, 2026. Some housing advocates are cautiously optimistic that the program will be extended since President Trump’s nomination to lead HUD, Scott Turner, is an advocate of the program. Kevin Hassett, the new director of the National Economic Council (NEC), also supports the program.

“The OZ incentive has proven, well documented, positive economic and social impacts in low-income communities across America,” Jason Walker, partner with Novogradac & Company LLC wrote on January 3 on behalf of the Novogradac Opportunity Zones Working Group. “The OZ incentive has earned the right to be extended and made a permanent part of the Internal Revenue Code.”

Walker’s letter, sent to Deputy Secretary of the Treasury Nominee Michael Faulkender, includes a 14-page outline of legislative proposals to enhance and strengthen the OZ incentive.

Turner ran the White House Opportunity and Revitalization Council, which coordinated investments in OZs during the first Trump administration. Before stepping into the director of NEC role, Hassett served as a member of the Economic Advisory Board of the Economic Innovation Group, a strong proponent of the OZ incentive.

Opportunity Zones Successes
Signed into law in December 2017, OZ legislation allows investors to defer paying capital gains taxes for up to nine years on gains from investments in Qualified Opportunity Funds (QOF) that invest in economically distressed communities, dubbed Opportunity Zones. The OZs are designated as such by state governors. The deferral is temporary, and the gain must be recognized on either Dec. 31, 2026, or the date the investment is sold or exchanged, whichever comes first.

In addition to the deferral of capital gains, the program allows for a step-up of basis for investments in OZs that are held beyond five and seven years.

According to the Joint Committee on Taxation, the OZ incentive has generated about $85 billion in QOF investments. Individual and corporate taxpayers can claim OZ tax benefits, but most of the investment comes from non-corporate taxpayers. Through the end of 2020, which is the most recent data, nearly half of all OZ-designated census tracts had received investments from the program. In Oregon, 76 percent of the zones received investment.

The Novogradac working group’s proposal for enhancing the OZ incentive states that OZ communities “experienced larger improvements in poverty, incomes and vacancies than their undesignated but eligible low-income community peers.”

“In addition to boosting the supply of housing, OZ designations improved local home values by 3.4 percent from 2017 to 2020 with no observed increase in median rent,” the proposal reads.

OZ investment also demonstrated positive impacts on neighboring areas, the proposal adds.

According to a 2020 report to President Trump on best practices in OZs throughout the nation, many of the QOFs have focused their efforts on affordable housing, while others have participated in the revitalization of Brownfields and other hazardous sites. In Chicago, a former hazardous waste site was cited as a best practice. It was redeveloped into a logistics and distribution hub, including a warehouse of more than 1.2 million square feet. In Seattle, a multifamily project was featured in the report that would include nearly 300 apartments in an OZ. The developers also participated in the city’s Multifamily Tax Exemption program, which ensures that 20 percent of units are set aside for workforce housing. In addition to the apartment units, the development will include more than 8,000 feet of retail space.

Proposed Enhancements to OZ Incentive
For near-term legislative changes to the OZ program, the Novogradac working group recommends extending the investment deadline and deferral period to 2028 to “recoup time lost during regulatory implementation and pandemic disruption…” The working group also suggests adding reporting requirements to make the OZs more transparent and to promote greater OZ investment in rural communities.

Proposed long-term programmatic changes include making the OZ incentive a permanent part of the tax code with all investors eligible for a full referral period. The permanence will address the problem that investment in the program has tapered off due to the Dec. 31, 2026 deadline approaching. The group calls for using data from the 2020 census for the initial redesignation of OZs. Future redesignations would follow each decennial census thereafter.

The group also calls for deeper distress requirements for OZ eligibility. Currently, to be eligible for an OZ designation, an area must meet the New Markets Tax Credit definition of a low-income community where a census tract has a poverty rate of at least 20 percent, among other requirements. The working group seeks to push the poverty rate requirement to 25 percent or where such tracts don’t exceed 70 percent of the median family income.

Under existing regulations, a governor can only designate 25 percent of eligible low-income tracts as OZs. The working group’s proposal aims to push that percentage to 35 percent. The group also endeavors to change the regulations so that capital gains from the sale of an OZ property can be treated similarly to Section 1031 gains where 100 percent of the proceeds are reinvested in another OZ property where the gains would not be recognized. Currently, investors are required to hold their investments in a QOF for a minimum of ten years to qualify for exclusion of capital gains.