What is the fundamental issue?
The Qualified Opportunity Zones (“QOZ”) program was enacted in the 2017 Tax Cuts and Jobs Act to encourage economic growth in underserved communities through tax incentives for investors. By offering tax benefits to investors, the program presents opportunities for real estate investment and development in those communities. U.S. states and territories, including Washington, DC, nominated areas (by census tract) to be designated as QOZs in 2018, and the IRS and Treasury finalized the designations that year. This temporary program is set to expire on December 31, 2047.
There are several potential tax benefits to investors who invest in a QOZ, if all requirements are met:
- First, capital gains reinvested (within 180 days of a sale to a nonrelated person) into a QOZ are tax-deferred as long as they are held in the program, through 2026.
- If the new investment is held for five years, the tax ultimately paid on the reinvested gains is reduced by 10%; if held for seven years, that reduction is increased to 15%.
- In addition, gains accrued on the new investment in a QOZ are free of future capital gains tax if they are held for at least ten years.
Investments in O Funds may be gains rolled over from a previous sale (within 180 days) and/or non-capital gains funds, but only reinvested capital gains are eligible for the tax benefits. If both gains and non-gains funds are invested, they are treated as separate investments and will receive different tax treatments.
To qualify for the tax benefits, investments into a QOZ must be made through an “Opportunity Fund” (O Fund), which may be a partnership or corporation organized for the purpose of investing in QOZ property. The requirements for an O Fund are:
- Must hold at least 90% of assets in QOZ property (which can be stock, partnership interests, and/or tangible property used in a trade or business within a QOZ, such as real estate);
- Must certify with the Treasury and IRS, via a self-certification filed with federal tax returns (Form 8996).
Finally, the “QOZ business property” that an O Fund invest in must be “substantially all” in a QOZ, which under the regulations is met if 70% or more of the property is in a QOZ. The statute also requires that after an O Fund acquires QOZ business property that it be either "original use" (new) or “substantially improved,” which means investing at least as much on the improvement as was paid for the used asset. "Original use" commences with depreciation, so an unfinished asset purchase by an O Fund in a QOZ can qualify for original use as long as it has not been depreciated yet. In addition, vacant/abandoned property can be considered original use if it has been in that state for at least five years. The regulations state that the basis of the land a business sits on does not need to be included for the substantial improvement requirement, thus reducing the required investment amounts.
I am a real estate professional. What does this mean for my business?
The QOZ program presents multiple opportunities for real estate professionals. On the front end, it provides a way for investors to redeploy investments in capital assets without paying the tax on any gains immediately, which may encourage them to sell real estate assets they might otherwise hold on to in order to delay taxes. On the back end, the Opportunity Funds created to invest in the zones will be looking for business property in which to invest, which in many cases will include real property and/or involve development opportunities for real estate.
NAR supports tax policies that provide the deferral and/or the exclusion of capital gains taxes on investments that are sold if the proceeds are reinvested into low-income or economically disadvantaged communities or neighborhoods that have been officially designated as eligible to receive such tax-incentivized funds.
The Treasury released the first set of proposed rules for QOZs in October 2018, which outlined several administrative aspects of the program. An IRS public hearing was held in February 2019 focusing on feedback from stakeholders and industry groups on those first proposed rules. A second round of proposed rules were released on April 17, 2019, which provide more in-depth details on the program and clarity on its administration. The Treasury Department has stipulated that the proposed rules are to be treated as effective to allow participation in the program to go forward until final regulations are out. In addition, agency "requests for information" were put out in April by the Department of Housing and Urban Development as well as the Treasury Department and the IRS, seeking feedback from stakeholders on data reporting requirements for the program.
On December 12, 2018, the White House issued an Executive Order establishing the White House Opportunity and Revitalization Council, chaired by Housing and Urban Development (HUD) Secretary Ben Carson and comprised of 13 Federal agencies. The Council will focus on ways to revitalize low-income communities, through streamlining coordinating existing Federal programs to economically distressed areas, including Opportunity Zones. In May 2019 HUD released a notice that it will be offering new incentives for multifamily property owners to invest in Opportunity Zones. It is not currently clear if the Biden Administration is going to continue with this Council.
Final rules for the program were released at the end of 2019, and they have provided some much-needed certainty for many investors who were waiting for them. In October 2019 the IRS announced it had drafted a form to collect information on Opportunity Funds, to help track whether investors in O Funds are complying with the law. In the 116th Congress, Senators Tim Scott (R-SC) and Cory Booker (D-NJ) introduced bill in the Senate (S. 1344) which would impose stronger reporting requirements, and which would aid in tracking investments into Opportunity Zones and evaluating the effectiveness of the program. However, this legislation has not yet been reintroduced in the current (117th) Congress.
Commercial Federal Policy Committee
Federal Taxation Committee
Treasury and IRS Final Regulations (December 2019)
Letters to federal agencies
NAR Federal Issues Tracker
NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require a password.
Qualified Opportunity Zones Toolkit (National Association of REALTORS®, Oct. 2019)
A resource for Associations to use as they work with state and local Economic Development Organizations, Opportunity Funds, and their membership to plan and implement development in QOZs.
Qualified Opportunity Zones Issue Summary (National Association of REALTORS®)
Get information about the policy side of Qualified Opportunity Zones with NAR’s Federal Issues Tracker. The Issues Tracker includes background information about QOZs, NAR’s policy, oppositional arguments, and the Legislative/Regulatory Status Outlook. Includes links to any current legislation and the legislative contacts from NAR’s Advocacy Team.
Opportunity Zones Frequently Asked Questions (Internal Revenue Service, Nov. 2, 2021)
These FAQs (and answers) help to explain opportunity zones and give links to the IRS notices and resources for opportunity zones.
Map of Opportunity Zones (Department of Housing and Urban Development, 2021)
An interactive map from the US Department of Housing and Urban Development (HUD) that allows you to search for QOZs. The map also links to more information about each state or territory’s opportunity zone strategy.
Final Regulations Issued Implementing Opportunity Zones Tax Incentive (Journal of Taxation of Investments, 2020) E
“This article summarizes a number of important clarifications and changes made to prior guidance by the final Treasury Regulations issued under IRC Section 1400Z-2 implementing the federal Opportunity Zone program. The article discusses provisions of the Final Regulations impacting investors, Qualified Opportunity Funds, Qualified Opportunity Zone Businesses, and Qualified Opportunity Zone Business Property, as well as the effective date and applicability of the Final Regulations.”
Qualified Opportunity Zones Background (National Association of REALTORS®, Fall 2018)
General questions, and links to additional resources, including a list of designated QOZs, a map of QOZs, and proposed rules by the Treasury.
Webinar: Capitalizing on Opportunity Zones and Section 199A (National Association of REALTORS® - login required)
NAR representatives discuss how these two new developments will affect the commercial real estate industry.
Real Estate & Passthrough Corner: Real Estate Finance Post-Tax Reform: New Markets Tax Credit, Rehabilitation Tax Credit and Qualified Opportunity Zones — (Journal of Passthrough Entities, May/Jun. 2018) E
Offers a great flow-chart about how to set up Qualified Opportunity Funds and how those invest in Qualified Opportunity Zones.
Qualified Opportunity Zone Boundaries Unaffected by 2020 Decennial Census Changes (Internal Revenue Service, Oct. 2021)
This announcement from the IRS clairifies that the Opportunity Zones established in 2018 and 2019 are not subject to the changes in Census tracts from the 2020 Census results.
Home Values in Opportunity Zone Redevelopment Areas Maintain Momentum Along with the Rest of U.S. Housing Market (ATTOM, Nov. 18, 2021)
A discussion of ATTOM’s report “analyzing qualified opportunity low-income Opportunity Zones” home prices. “Values in markets scattered through so-called Opportunity Zones kept rising at around the same pace seen in more upscale areas, as the housing-market boom kept lifting fortunes just about everywhere,” said Todd Teta, chief product officer with ATTOM. “Home values in Opportunity Zones are still very low relative to other areas. But the ongoing gains showed that lots of households are buying in those areas – something that should lure the attention of investors looking to take advantage of Opportunity Zone tax breaks.””
Opportunity Zones: A Place-Based Incentive for Investment in Low-Income Communities (Cityscape: Journal of Policy Development and Research, 2020) E
“The Tax Cuts and Jobs Act of 20171 included several major revisions of the U.S. tax code. Although the press thoroughly covered changes to marginal tax rates, deduction rules, and corporate rates, at least one section only received its share of attention more recently. This section, 1400Z,2 created a new place-based tax incentive intended to spur economic development and job creation in distressed communities designated as “Opportunity Zones.” Although Opportunity Zones (OZs) are the latest place-based tax incentive, they also represent a sweeping expansion of the approach— both in terms of the potential tax benefits being provided and the huge scale of the geography now covered for reduced income taxes for investors.”
Be An Opportunity Zone Leader (REALTOR® Magazine, Oct. 30, 2019)
“Whether you’re interested in participating yourself or helping clients learn more about these investment opportunities drawn from every eligible census tract in the U.S., the National Association of REALTORS® is providing support to local REALTOR® associations to help members take advantage of the new program. REALTORS® have been connecting with community stakeholders to help identify development priorities that fall within opportunity zones in or around where they live and work.”
Ensuring Opportunity Zones Work for All (REALTOR® Magazine, May 15, 2019)
“Chris Coes, vice president of land use and development for Smart Growth America, spoke at the Housing Opportunity Committee on May 15 during the REALTORS® Legislative Meetings & Trade Expo in Washington, D.C. Coes discussed opportunity zones and presented risks of community displacement. It's important, he said, that real estate professionals consider vulnerable populations and businesses to ensure they, too, benefit from growth and redevelopment.”
IRS Issues Guidance Relating to Deferral of Gains for Investments in a Qualified Opportunity Fund (Internal Revenue Service, Apr. 17, 2019)
“The proposed regulations allow the deferral of all or part of a gain that is invested into a Qualified Opportunity Fund (QO Fund) that would otherwise be includible in income. The gain is deferred until the investment is sold or exchanged or Dec. 31, 2026, whichever is earlier. If the investment is held for at least 10 years, investors may be able to permanently exclude gain from the sale or exchange of an investment in a QO Fund.”
Opportunity Zones Hype Overshadows Potential Pitfalls and Risks (National Real Estate Investor, Mar. 26, 2019)
This article discusses how the tax benefits can blind investors to the project's lack of viability and social impact.
Recent Developments & Observations: Qualified Opportunity Zones — A Boon With Uncertainty (Journal of Passthrough Entities, Sep./Oct. 2018) E
Looks at the new qualified opportunity fund and how it raises some of the difficult questions that arise under the new law, including the restrictions on opportunity zone business growth, the hazy definition of “substantial improved property” to qualify for tax breaks in an opportunity zone, the amount of unqualified property an investor may hold in opportunity zone assets, and the disparity in the tax basis.
Opportunity Zones: Vital Tool or Tax Windfall for Rich? (Washington Informer, Oct. 11, 2018) E
This short article talks about African Americans can benefit from the Opportunity Zone program.
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