Extensions and Permanency for Opportunity Zone Investors

One component of the new tax bill is the extension, and permanency, of the Opportunity Zone tax incentive program.

The Tax Cuts and Jobs Act of 2017 (TCJA) first created the Opportunity Zone tax incentive program. Essentially, the program designates underdeveloped areas (called Opportunity Zones) and encourages investment into these zones by allowing qualified investors to temporarily defer capital gains and, if certain requirements are met, achieve a 100% gain exclusion after 10 years.

Certain elements of the original Opportunity Zone program depended upon timing. For example, investors deferring gains by the end of the 2019 tax year could reduce their gain inclusion by up to 15%. But for investors deferring gains after 2021, no reduction is available, and the OZ program was originally set to expire for new investors after the 2026 tax year.

Permanency and New Benefits of the Opportunity Zone Program

The new legislation now makes the Opportunity Zone tax incentive program permanent, allowing investors deferring gains after the 2026 tax year to adopt a rolling 5-year gain deferral period.

There will also be a 10% reduction to the deferred gains for investments (made after the 2026 tax year) held for five years, and an enhanced 15% reduction for qualified investments into certain “rural” zones held for five years.

After the 2026 tax year, new OZ areas will be designated based upon updated criteria (with new designations every 10 years).

The basic framework for opportunity zone investment remains unchanged. Investors still defer gains by investing in Qualified Opportunity Funds (QOFs) and QOF investments must be held for at least 10 years to achieve full gain exclusion upon a sale, assuming all other requirements are met. QOFs in turn generally invest into Qualified Opportunity Zone Businesses (QOZBs) and follow various eligibility requirements to avoid penalties and maximize investor tax benefits.

New Reporting Requirements

Both QOFs and QOZBs will have increased information reporting requirements as part of this new legislation. This generally will take the form of new forms (and related information) to be filed with the Internal Revenue Service (IRS) as part of an entity’s yearly tax filing obligations.

This new information reporting may allow the government to better determine whether, and to what extent, the Opportunity Zone tax incentive program is effectively directly investment into underserved areas.

Next Steps for Opportunity Zone Program

The OZ tax incentive program is now permanent, allowing for underserved communities and investors to make investment decisions with a long-term horizon. Still, there are complexities and traps for unwary OZ investors, so potential investors should work with a qualified advisor before making any investment decisions.

Our team is experienced with all facets of the Opportunity Zone program and ready to help you prepare for these and other tax legislation changes.