As part of its work on the major budget and tax bill, the Senate has introduced a measure that would offer “permanent renewal and enhancement of opportunity zones.”
Continuing funding of affordable housing programs like opportunity zones (OZs) and the Low-Income Housing Tax Credit was seen as likely. In February, Secretary of Housing and Urban Development Scott Turner said he looked to increase work on OZs. The program has long been seen as effective and delivering on its promises.
The current round of OZ designations based on the 2017 is scheduled to end on December 31, 2028. Focused on low-income communities — census tracts with either a poverty rate of at least 20% or a median family income no higher than 80% of the area's average income. Investors put money into a Qualified Opportunity Fund organized as a corporation or partnership to invest in QOZ property.
If enacted, the new structure would create a series of rolling ten-year OZ designations that would begin at the start of 2027. The qualifications needed for a designation would be narrower: either a poverty rate of at least 20% or a median family income that doesn’t exceed 70% of the area median income. There’s an additional “guardrail” that a low-income community “does not include any census tract where the median family income is 125% or greater of the median family income.”
That guardrail definition sounds as though it might need some adjustment, as the median family income shouldn’t be greater than the median family income. Perhaps the intent was to ensure that a 20% poverty rate wouldn’t be sufficient for designation if the median family income was too high, but the added language doesn’t seem to make sense as it stands. That said, the document is a description of what the Senate is planning and so is not the final legislative language.
The new version of opportunity zones keeps the three taxpayer benefits from the 2017 Tax Cuts and Jobs Act and also offers incremental reductions in gain starting on the first anniversary of the investment. In the seventh year, investors will have to realize initial gains decreased by a step-up in basis. For each year an investor remains invested, there is a step-up in basis as follows: 1% in years 1–3, 2% in years 2–5, and 3% in year 6.
There is also a type of QOF that invests only in rural areas. Investments in “qualified rural opportunity funds” receive triple the step-up in basis. A special rule lowers the needed “substantial improvement” in existing structures from 100% to 50% in rural areas.
There would also be added reporting requirements for an OZ program and funding to the IRS to carry them out.
Barrett Linburg, co-founder of Savoy Equity Partners, which specializes in multifamily and regularly uses OZ structures, noted that the measure is “still a work in progress.” The bill still goes through markup. Linburg wrote, “two game-changing additions could still make it: allowing non-capital gains and interim gains rollover. Both should score ~$0 but would massively increase community impact.”
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