Opportunity Zone Program Poised for Overhaul Under New Reconciliation Bill

According to Corporate and Tax partner Josh Becker, the proposed reforms are designed to address some of the shortcomings of the original program.

“The opportunity for this opportunity zone program to have a second life is something that a lot of people are excited about,” Becker said.

Initially introduced as part of the 2017 Tax Cuts and Jobs Act, the qualified opportunity zone (QOZ) program is set to largely expire at the end of this year. Under the existing framework, investors can defer taxes on capital gains by reinvesting them into a qualified opportunity fund (QOF).

As such, Becker pointed out a key long-term benefit: after 10 years, investors may sell fund assets without paying capital gains tax. However, this advantage has yet to be realized since the 10-year holding period has not elapsed for early participants.

One key issue, Becker noted, was the outdated criteria used to designate eligible neighborhoods.

“A great example of this would be the Wynwood Art District in Miami. That neighborhood was designated as an opportunity zone but in many respects had already experienced almost a decade’s worth of significant gentrification,” he said.

Other areas, including Manhattan’s Lower East Side, faced similar scrutiny.

“A scrutinizing person would say that neighborhood was somewhat depressed 10 years ago, but now I’m not sure if it makes sense to be incentivizing what were, in some cases, luxury condo buildings getting built with tax incentives in those neighborhoods,” he said.

Becker explained that, under the new legislation, the program would designate new opportunity zones with stricter criteria.

“New opportunity zones would be designated, and those areas would be subject to much greater scrutiny and requirements,” he said.

In addition to updating the definition of “low-income community,” the bill mandates that at least 33% of newly designated QOZs be located in rural areas. Investors holding interests in rural tracts for five years would receive a 30% reduction in capital gains tax.

“It’s really meant to be funneling serious and significant investments into rural America,” Becker said.

Industries such as manufacturing, energy infrastructure and asset classes like data centers could see increased opportunities under the program’s rural focus. The bill also calls for enhanced reporting from QOFs and their associated businesses.

“Congress wants to really scrutinize who and what is getting the benefits of this program,” Becker said. “They want to be able to measure the benefits and see that there really is meaningful change occurring in these neighborhoods as a result of the program.”

While several aspects of the reconciliation bill have faced ongoing debate, Becker emphasized that the opportunity zone provisions remain relatively uncontroversial. Most of the proposed changes are expected to survive in the final version, he said.

“This reads to me, at least from a big picture perspective, like legislation that is very serious and intended to gather bipartisan support,” he concluded.

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