Bipartisan legislation introduced this week by a group of House policymakers would update and amend the Opportunity Zones (OZs) program. The Roundtable-supported bill (H.R. 5761), if enacted, would extend the tax deferral date for OZ investments from the end of 2026 to the end of 2028, expand transparency and reporting requirements, and authorize investment structures that permit an Opportunity Fund to own and operate multiple real estate assets. (House OZ bill text)
Reps. Mike Kelly (R-PA), above, —chairman of the Ways and Means Subcommittee on Tax—along with Dan Kildee (D-MI), Carol Miller (R-WV), and Terri Sewell (D-AL) introduced the bill on Sept. 27. The bill is similar to legislation (H.R. 7467 and S. 4065) introduced in the last Congress. (Rep. Kelly news release, Sept. 29)
Roundtable President and CEO Jeffrey DeBoer welcomed the Opportunity Zones Improvement, Transparency, and Extension Act. “Opportunity Zones have delivered on their promise to create new economic opportunities in low-income communities. Real estate developments spurred by the Opportunity Zone tax incentives are expanding the supply of affordable housing and creating vibrant commercial centers where small businesses can reside, jobs can grow, and the local tax base can expand.”
“Unfortunately, certain OZ incentives have already expired. The new legislation would strengthen the program’s integrity and ensure Opportunity Zone investment continues into the future. Congress should act quickly to enact these measures,” said DeBoer.
2023 OZ Reforms
The OZ program, created in the Tax Cuts and Jobs Act of 2017, designated low-income census tracts where qualifying investments are eligible for reduced capital gains taxes, channeling investment into areas prioritized by states and local communities.
This week’s legislation includes a 2-year extension of the initial capital gains deferral period for prior gain that is rolled into an opportunity fund by an investor. (Legislative text for H.R. 5761 | Roundtable comment letters: Dec. 21, 2021 and May 14, 2020)
The 2-year extension from the end of 2026 until the end of 2028 will allow OZ investors to benefit from a partial step-up in basis that reduces their tax liability on their prior gain if their opportunity fund investment is maintained for at least five years.
Additionally, the bill would facilitate fund-of-fund investment structures that allow opportunity funds to own and operate efficiently more than one asset. Similar to traditional real estate funds, the structure would allow an opportunity fund to sell a property and reinvest the proceeds in another qualifying Opportunity Zone investment without triggering a taxable event for the fund’s underlying investors, provided the investors themselves have not disposed of their interest.
Other provisions would establish robust OZ reporting requirements, mandate Treasury to produce certain studies and reports on the OZ program, sunset high-income OZs, and create a new $1 billion fund for states to support business activities in OZs
Prospects for the 2023 bill are uncertain, but the legislation is a likely candidate for consideration if, and when, House and Senate Leaders sit down to negotiate an end-of-year tax package that focuses on expired provisions—such as the expanded child tax credit, the expensing of R&D costs, and bonus depreciation.
Members of Congress introduced bipartisan, bicameral legislation yesterday to update and amend the Opportunity Zones (OZs) program. If enacted, the bill would extend expired OZ benefits, sunset certain high-income OZ census tracts, and apply additional information reporting requirements for opportunity funds and their investors. (Congressional news release, April 7)
The bill includes a Roundtable-requested, 2-year extension of the initial capital gains deferral period for prior gain that is rolled into an opportunity fund by an investor. (Roundtable Comment letters: Dec. 21, 2021 and May 14, 2020)
The 2-year extension, from the end of 2026 until the end of 2028, will allow OZ investors to benefit from a partial step-up in basis that reduces their tax liability on their prior gain if their opportunity fund investment is maintained for at least 5 years. The extension would help OZs continue attracting capital and investment that is boosting job growth and supporting the local tax base in these communities.
Other provisions include a detailed process for sunsetting certain high-income census tracts from the OZ program; new information reporting rules for Opportunity Funds and investors; and creation of a $1 billion State and Community Dynamism Fund to support OZ projects and businesses in underserved communities.
Census tracts subject to the sunset provision include those with a median family income that exceeds 130 percent of the national median. The sunset includes transition rules that grandfather in existing and planned investments.
The information reporting proposals were previously introduced by Senator Scott in 2019. They aim to improve program transparency and facilitate improved tracking of the OZ investment outcomes in the designated communities. The Roundtable and other real estate organizations previously encouraged Congress to adopt enhanced OZ information reporting, data collection, and transparency measures. (Roundtable Comment letter: Dec. 21, 2021)
In the short time since their enactment, Opportunity Zones have created jobs and spurred billions of dollars in new investment in economically struggling communities. The Roundtable worked closely with Members of Congress and the Treasury Department to ensure OZ implementing regulations would facilitate the program’s success, and has long-supported OZ legislation that could spur greater investment, promote capital formation and bolster job growth in economically disadvantaged communities. (Roundtable Weekly: May 15, 2020 and (Roundtable Comment letter: Dec. 21, 2021)
In the current legislative environment, prospects for the new bill are uncertain, but it will likely be the basis for any serious consideration of OZ changes going forward.
The Internal Revenue Service (IRS) yesterday issued broad relief for Qualified Opportunity Zone Funds and their investors in response to the ongoing COVID-19 pandemic. (IRS news release, June 4)
IRS Notice 2020-39 includes five helpful changes and clarifications to the current rules governing the capitalization and operation of opportunity funds. The Roundtable’s Opportunity Zone Working Group has strongly supported greater flexibility in the Opportunity Zone rules to ensure that capital investment continues to flow to hard-hit, low-income communities during the economic crisis brought about by COVID-19.
Under the new guidance:
if the 180-day investment period to roll gain into an opportunity fund would have expired between 4/1/20 and 12/31/20, the deadline is now extended to 12/31/20;
if an opportunity has a compliance date for the 90% investment asset test that falls between 4/1/20 and 12/31/20, failure to comply is automatically excused under the reasonable cause exception;
the 30-month substantial improvement period for real property owned by an opportunity fund or opportunity zone business from 4/1/20 through 12/31/20 is disregarded;
the IRS has clarified that the working capital safe harbor for opportunity fund working capital assets is extended under the President’s emergency declaration by 24 months (for a total period of 55 months) if the working capital is held by the fund before 12/31/20 and the other requirements for the safe harbor are met; and
the 12-month period for an opportunity fund to reinvest proceeds from the return of capital or disposition of property is extended by an additional 12 months if the original period included 1/20/20, the date of FEMA’s major disaster declaration and other requirements are met.
The Roundtable and a broad coalition of real estate organizations continue to support more significant enhancements to Opportunity Zones that would require congressional action.
The 11-member industry coalition urged members of Congress on May 14 to consider Opportunity Zones (OZ) rule changes that could spur investment, promote capital formation and bolster job growth in economically disadvantaged communities impacted by the coronavirus pandemic. (Coalition letter)
The IRS changes this week come not long after the coalition’s letter, and several regulatory recommendations made by Sen. Tim Scott (R-SC) and eight other Senate Republicans on May 4 in a letter to Treasury Secretary Mnuchin and IRS Commissioner Charles Rettig. (Roundtable Weekly, May 8)
The Roundtable’s Tax Policy Advisory Committee will discuss Opportunity Zone guidance and other tax relief resulting from the COVID-19 pandemic during the first Virtual Roundtable Annual Meeting on June 12.
The Treasury Department yesterday released final regulations implementing Opportunity Zones (OZ) tax incentives. The details of the 544 pages of regulations are still under review, but the highly anticipated rules appear to embrace key Roundtable recommendations aimed at spurring capital formation and economic development in low-income communities. (Roundtable comment letter, July 1, 2019)
The final regulations provide helpful guidance in several areas that should remove taxpayer uncertainty and allow productive real estate investments in low-income communities to move forward.
Clarify the types of gains that may be invested in opportunity funds and when. For example, they amend a general rule in the proposed regulations that only capital gain may be invested in an opportunity fund. The rules allow a taxpayer to invest the entire amount of gain from the sale of business property, which can include gain from the sale of real estate.
Clarify when gain may be excluded from tax after an investment is held for a 10-year period. The proposed rules did not allow an investor to exclude gain when the subsidiary of an opportunity fund sold an asset. The final regulations liberalize these rules, which should greatly facilitate the formation and operation of real estate-focused opportunity funds that invest in multiple properties.
Include important changes to how an investment is measured when testing whether an opportunity fund has substantially improved real estate. The rules provide opportunity funds with greater flexibility to aggregate multiple assets. For example, they permit a group of two or more buildings located on the same parcel(s) of land to be treated as a single property—thus eliminating the need to increase the basis of each building by 100 percent.
Allow a vacant property to be treated as being put to its original use in an opportunity zone if the property has been vacant for a continuous period beginning one year prior to the census tract’s designation as an opportunity zone. The proposed regulations would have required a property to be vacant for five years. A property that meets the original use requirement is not subject to the substantial improvement requirement.
Provide important refinements to the previously proposed working capital safe harbor. The safe harbor provides opportunity funds with a minimum of 31 months to invest their working capital in qualified opportunity zone property, rather than the six months suggested in the statute. This longer runway aligns better with the practical realities of real estate investment. The final regulations ensure that an opportunity fund that is using working capital to improve real estate will be able meet the opportunity zone requirement that it be engaged in a trade or business.
The Roundtable has strongly supported the Opportunity Zone tax incentives since their enactment as a potentially powerful catalyst for transformative real estate investment in economically struggling parts of the country. (GlobeSt.com interview with Roundtable President and CEO Jeffrey DeBoer and Roundtable SVP and Counsel Ryan McCormick –July 16, 2018).
The Roundtable’s Tax Policy Advisory Committee and its Opportunity Zone Working Group will be analyzing fully this week’s 544 pages of rules and will report on the details during The Roundtable’s Jan. 28-29 State of the Industry meeting.
The White House’s Office of Management and Budget (OMB) is reviewing a set of highly anticipated final rules for the Opportunity Zones program created by the 2017 Tax Cuts and Jobs Act, according to a Dec. 6 OMB notice. The rules will address requirements of qualified opportunity funds that invest in opportunity zones (OZs).
OZ investors are looking for clarifications on a number of open issues that will help qualified opportunity funds drive economic development in economically distressed communities nationwide.
Treasury released its first set of proposed OZ rules in Oct. 2018, followed by expanded guidance in April 2019. The Treasury rulemakings have reduced investor uncertainty and encouraged capital formation, job creation and productive real estate. However, certain questions remain that warrant additional guidance, such as whether an existing owner can retain a carried interest when selling property to a related Opportunity Fund.
In Congress, GOP senators on Dec. 6 introduced a bill that would expand information reporting requirements for OZ investments, including requiring investors to report the number of full-time workers employed by opportunity zone projects. (BGov, Dec. 8 and Sen. Marco Rubio news release, Dec. 9)
Democratic lawmakers in the Senate and House have also recently proposed measures that would require more reporting requirements about Opportunity Zone investments – as well as reform the tax incentive, and formally investigate recent allegations of wrongdoing related to the program. (Roundtable Weekly, Nov. 8)
The Roundtable has strongly supported the Opportunity Zone tax incentives since their enactment as a potential powerful catalyst for transformative real estate investment in economically struggling parts of the country. (GlobeSt.com interview with Roundtable President and CEO Jeffrey DeBoer and Roundtable SVP and Counsel Ryan McCormick –July 16, 2018).
Through its Tax Policy Advisory Committee and Opportunity Zone Working Group, The Roundtable will continue to contribute to the implementation and oversight of the Opportunity Zone incentives, offering constructive comments and recommendations to Members of Congress and Treasury officials.
In response to allegations that the Treasury Secretary improperly intervened in the designation of certain census tracts as Opportunity Zones, key Democratic lawmakers put forward proposals this week to enhance Opportunity Zone information reporting, reform aspects of the tax incentives, and formally investigate the reports of wrongdoing.
The allegations, published in the New York Times, have been denied by both Treasury Secretary Steven Mnuchin and Michael Milken, the implicated private investor. (Bloomberg, Oct. 29, 2019) (Letter from Michael Milken to the Milken Institute Community)
On Monday, the Chairman of the House Ways and Means Committee Richie Neal (D-MA) and the Ranking Democrat on the Senate Finance Committee Ron Wyden (D-OR) announced they were launching an investigation to determine “whether political appointees interfered in the process to potentially steer millions in tax breaks to longtime associates.” (Letter to Treasury Secretary Mnuchin requesting a wide range of documents and records.)
The same day, Chairman Neal, Senator Wyden, Ways and Means Oversight Subcommittee Chairman John Lewis (D-GA), and Senator Cory Booker (D-NJ) sent a letter asking the Government Accountability Office (GAO) to collect and analyze information about how the Opportunity Zones incentive has been implemented by Treasury and the IRS, how census tracts were designated as Opportunity Zones, what compliance measures were used to ensure adherence to the law, and how the Treasury Department can measure the effectiveness of the tax incentive.
Just two day later, on Wednesday, Senator Wyden introduced the Opportunity Zone Reporting and Reform Act (S. 2787). Under the bill, in addition to requiring greater taxpayer reporting, certain previously certified census tracts would no longer qualify as Opportunity Zones. Several types of real estate assets would be blacklisted and ineligible for investment (e.g., self-storage property, stadiums, casinos). In the case of opportunity funds that are renovating or rehabilitating existing structures, the bill would increase the level of new investment required to qualify for benefits.
The Wyden bill would exclude multifamily housing as an eligible Opportunity Zone investment unless 50 percent or more of the housing units are rent-restricted and occupied by tenants whose income is 50 percent or less of the area median income. (Detailed Summary)
If enacted, the restriction on multifamily housing could have a profound negative impact on future Opportunity Zone investment. New research indicates that multifamily construction starts represented over one-half (53.2%) of the total commercial real estate investment in Opportunity Zones over the last 18 months. (CBRE, Multifamily Development: A Bright Spot in Opportunity Zone Initiative, Nov. 6, 2019)
Also on Wednesday, Representatives Ron Kind (D-WI), Mike Kelly (R-PA), and Terri Sewell (D-AL) unveiled bipartisan draft legislation to enhance reporting requirements for opportunity funds. The Opportunity Zone Accountability and Transparency Act would require opportunity funds to submit annual information reports that would be publicly available. In the case of real estate investments, funds would report information such as: the aggregate amount invested, structures’ square footage, the number of residential units, the number of low-income residential units, and the number of employees, Failure to report information accurately could trigger a penalty up to $200,000.
Since its enactment, The Real Estate Roundtable has strongly supported the Opportunity Zone tax incentives as a potential powerful catalyst for transformational real estate investment in economically struggling parts of the country. Through its Tax Policy Advisory Committee and Opportunity Zone Working Group, The Roundtable has played an active role throughout the lengthy rulemaking process, offering constructive comments and recommendations to Treasury officials. (GlobeSt.com interview with Roundtable President and CEO Jeffrey DeBoer) (Roundtable Weekly, Dec. 21, 2018)
Bipartisan Senate legislation introduced May 8 would direct the Treasury Department to collect data and issue annual reports on Opportunity Zone (OZ) tax incentives. Reporting requirements were included in the original Investing in Opportunity Act before Congress passed it as part of tax reform in December 2017.
The Opportunity Zones bill (S. 1344)—introduced by Sens. Cory Booker (D-N.J.), Tim Scott (R-S.C.), Todd Young (R-Ind.), and Maggie Hassan (D-N.H.)—would require data on the number of opportunity funds created, their asset classes, their holdings, and their economic ripple effects in the designated OZs where they invest. (BGov, May 8)
Congress approved the creation of Opportunities Zones-economically distressed areas characterized by high poverty and subpar employment opportunities-and tax incentives to encourage redevelopment in these lower-income communities.
The program allows for capital gain related to a current sale or transaction to be deferred until December 31, 2026 – if investors place their capital gain into a fund that makes qualified investments in Opportunity Zones. Individuals and entities can contribute to these Opportunity Funds.
The bill (S. 1344)—introduced by Sens. Cory Booker (D-N.J.), Tim Scott (R-S.C.), Todd Young (R-Ind.), and Maggie Hassan (D-N.H.)—would require data on the number of opportunity funds created, their asset classes, their holdings, and their economic ripple effects in the designated OZs where they invest. (BGov, May 8)
“Already leaders in rural and urban communities across the country are beginning to use Opportunity Zones as a valuable new tool to drive high-impact investment into their communities,” Sen. Booker said. “This legislation will restore and strengthen transparency measures to ensure [the Opportunity Zones program] lives up to its original promise and delivers real impact to those who need it most.” (Sen. Booker news release, May 8)
“Opportunity Zones have been a unifying message for both Republicans and Democrats,” Sen. Scott said. “It’s imperative that we create reporting requirements to allow us to accurately measure the success of the initiative…”
No action on S. 1344 is imminent, though Congress could consider tax legislation this summer or fall.
Freddie Mac has released an analysis of its own financial data to show multifamily market characteristics in Opportunity Zones. Notable among the reports many findings were the following:
Freddie Mac has released an analysis of its own financial data to show multifamily market characteristics in Opportunity Zones.
Housing units in OZs tend to be relatively old-28.7% of the multifamily rental stock was built prior to 1960 (compared to a rate of less than 20% elsewhere).
The population density of OZs is low-about two-thirds of the national rate
Of the 117 opportunity funds identified by the National Council of State Housing Agencies as of April, 76% have an investment focus on multifamily residential development.
The report concludes that census tracts designated by governors as OZs “overlap quite well with areas that Freddie Mac targets for affordable housing assistance.”
The OZ program’s goals and incentives were the focus of a Jan. 29 discussion during The Real Estate Roundtable’s State of the Industry Meeting, which featured Sen. Scott and Roundtable member Geordy Johnson (CEO, Johnson Development Associates, Inc.). (Roundtable Weekly, Feb. 15)