While sitting in a breakfast meeting casually sipping coffee and talking about which consulting firms have flexed intellectual brainpower to address and work on opportunity zone (OZ) matters, the discussion quickly shifted from talking about how consultants are educating advisory firms to talking about why the incentive program even exists at all.
I set down my cup and started to dig in. I started to explain that the Tax Cuts and Jobs Act created a new tax-advantaged OZ program to encourage investments in economically distressed communities, nominated by governors and certified by the Treasury Department. My peer stopped me and said that he’s seen this movie before and that Congress had previously tried similar approaches with empowerment zones and renewal communities. I stopped him immediately—this effort is unique and extremely generous to investors who recognize the upside potential.
The program allows taxpayers to postpone taxes on profits from the sale of any property until 2026 if those profits are reinvested in an OZ fund that invests in businesses in a targeted community. The program also incentivizes taxpayers by allowing them to exclude from tax any gains that arise from investing in the fund if the fund is held for 10 years or longer. In turn, this incentive then can mean major profits for both investors and syndicators.
Empowerment zone and renewal communities programs permitted just capital gains to be deferred. The OZ program appears to permit other income to be deferred, including gains from the sale of inventory.
Another feature that stands out about OZs is that a taxpayer doesn’t need to invest his entire proceeds of a sale—only the gains. The capital gains provisions of empowerment zone and renewal community programs forced taxpayers to reinvest all sales proceeds, not just profits.
While OZs are in the same spirit as empowerment zones and renewal communities, these earlier programs were limited in scope in that there were only about 40 authorized areas by Congress of each program type. OZs, however, are more expansive and broader in scope, thereby allowing syndicators to organize and market particular projects. The fact that there are over 8,700 Treasury-certified OZs means that investors can more expansively invest. In turn, investors can choose to designate capital to eligible OZ funds with businesses such as residential rental property businesses, which were excluded by the earlier programs.