Tax incentive programs sometimes don’t deliver on their promise. That’s not the case with the Opportunity Zone (OZ) program, part of the Tax Cuts and Jobs Act of 2017. Now, the question is whether some new version of the original concept, which faces its planned expiration date, will pass Congress and be signed into law.
According to a CoStar analysis, OZs helped achieve completion rates for low-income household multifamily units at more than twice the national pace before the program. About 68,000 more apartment units opened in OZs than before the tax breaks started. Based on CoStar’s average sale price per unit, those additional units have an estimated value of more than $18 billion.
In 2017, OZ apartments comprised 12% of all units in the U.S. By 2018, it grew to 14%, then 15% in 2019 and 2020, and 18% in 2021. Currently, 23% of apartments under construction are in opportunity zones.
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Availability of new apartment units in OZs rose 151% to 143,219 between 2017 and 2024. That’s more than double the 63% gain to 807,206 units across all U.S. markets. But all markets would include the OZs, understating the difference. The number of non-OZ units in 2024 was 663,987, representing 51.5% growth from 2017.
Under the program, there are 8,764 OZ communities across all 50 states, the District of Columbia, and five U.S. territories, according to the IRS. The attraction for investors was the ability to defer tax on capital gains if they put that money into a Qualified Opportunity Fund. The tax benefits depended on the amount of time holding a QOF investment. Five years and the basis of the QOF investment increased to 10% of the deferred gain. At least seven years and the basis increased to 15% of the amount. Ten years or more and the investor could adjust the basis to fair market value on the date the QOF was sold or exchanged. However, the only gains recognized for tax purposes must come before January 1, 2027.
By the end of 2024, Novogradac & Co., a San Francisco-based accounting, valuation and consultancy firm, tracked 2,033 qualified funds. Of those, 1,611 reported a specific raised dollar amount — a total of more than $40 billion, according to CoStar. Three-quarters of all equity was raised for residential properties.
A study by the Economic Innovation Group used HUD data and found “that the OZs caused a large — and still rising — increase in housing supply in designated communities.” Also, they estimated that the cost per housing unit was “extremely low compared to other housing incentives.”
Time is running out, and the program is set to end by December 31, 2026. Some critics say there are necessary changes. “In truth, while the opportunity zone program has had promising outcomes, the law and regulations present structural flaws that make using the program difficult and cumbersome for many taxpayers,” wrote Andrew Weiner and Joshua Becker of Pillsbury Winthrop Shaw Pittman.
For example, they claim that the rules “unintentionally favor small, closely held funds and family offices.” Also, if a project fails or is delayed, there are few ways of preserving tax benefits. They also suggested expanding the program to allow contributions of regular cash. “As a result, many investors have stayed on the sidelines, thereby limiting capital investments into designated neighborhoods,” the two wrote.
Reportedly, the program has new backers in D.C., and some expect to push a 2.0 version. However, given the turmoil in the capital, any legislation could be challenging to pass.
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