Making The Opportunity Zones Program Great At Last

Most provisions expire at the end of 2025, but the ability to reinvest capital gain proceeds on a tax-deferred basis under the opportunity zone program is set to expire at the end of 2026.

With a second Trump administration and a Republican-led Congress, there is renewed interest in extending and improving the program. Trump has signaled his support. The new secretaries of the U.S. Department of the Treasury and the U.S. Department of Housing and Urban Development are also reportedly in favor of expanding opportunity zones.

You could call this effort "making opportunity zones great again," but that implies the original program was already great.

In truth, while the opportunity zone program has had promising outcomes, the law and regulations present structural flaws that make using the program difficult and cumbersome for many taxpayers. As a result, many investors have stayed on the sidelines, thereby limiting capital investments into designated neighborhoods.

With the ability to defer capital gain taxation ending soon, a second Trump administration could seize this moment to both extend and improve the program.

This article summarizes the original opportunity zone program, and explores what the Trump administration and a Republican-led Congress might do to enhance it in this new political landscape.

The Original Opportunity Zone Program

The opportunity zone program allows taxpayers to reinvest capital gains into designated low-income areas in exchange for tax incentives. More than 8,750 urban and rural census tracts have been designated as opportunity zones.

Taxpayers invested in these areas through qualified opportunity funds, which are partnerships or corporations that hold equity in qualifying businesses or property located in such opportunity zones. Many of these funds were registered with the U.S. Securities and Exchange Commission, while others were smaller or family office investment vehicles.

Key Tax Benefits of the Program

Deferred Capital Gains
Taxpayers could defer capital gains realized before Dec. 31, 2026, by reinvesting them into a qualified opportunity zone investment.

The deferred gains become taxable on the 2026 return if not realized earlier.

Partial Elimination of Taxes
When the program began in 2017, it allowed taxpayers to permanently eliminate taxes on part of their reinvested gains. Unfortunately, this benefit only applied to taxpayers who made a tax-deferred investment prior to Dec. 31, 2021.

Tax-Free Appreciation
If an opportunity zone investment is held for at least 10 years, upon its sale any appreciation in value realized will be tax free, provided it is sold before 2047.

Challenges

Regulatory Delays
While the opportunity zone program was enacted in 2017 as part of the TCJA, final regulations were not issued until December 2019. As a result, many investors were effectively left on the sidelines for two years until clarity was provided by final regulations.

Timing
The COVID-19 pandemic soon followed release of the final regulations, further hampering investments and development projects.

State Differences
While some states matched the federal opportunity zone program incentives, many did not, limiting the program's reach.

Remaking the Opportunity Zone Program

Here are some ways the Trump administration and Republican-controlled Congress could take the opportunity zone program to the next level.

1. Extend the Program Timeline
Congress could push the end date for tax deferral and investment beyond 2026, giving investors more time to enter the program. Some parts of the program might even be made permanent.

2. Revisit Deferred Gain Recognition
Rather than having all deferred gains recognized in 2026, Congress could move the deadline to 2030 or adopt rolling deferrals whereby taxpayers enjoy five years of deferral from the date of each investment.

3. Refine Designated Areas
The original opportunity zone map was based on census tracts identified as low-income under the 2010 census, which led to criticism that certain areas were not truly distressed.

A revised program could better target communities that need assistance by incorporating new or updated census data. It might also include areas struck by recent disasters or other events.

4. Encourage State-Level Participation
More states could be encouraged to match federal opportunity zone benefits. This piggyback approach would amplify the program's impact and make investing more attractive.

Addressing Structural Issues

Inducing Institutional Fund Investments
One challenge with the first opportunity zone program is that its rules unintentionally favor small, closely held funds and family offices, partly due to strict timelines for deploying capital. To induce larger institutional fund investments, Congress could relax these deadlines or offer more flexible structures that accommodate diverse investor groups.

Handling Failed Deals
If an opportunity zone project fails or is delayed, current rules offer limited options for preserving the tax benefits. Providing a grace period or the ability to roll investments into a new qualifying project without penalty would give investors more confidence and thus increase taxpayer participation.

Broadening Eligibility
Finally, the program could be expanded to reward not just reinvested capital gains but also contributions of regular cash or sweat equity. This would open the door for more taxpayers—especially smaller investors and business owners—to participate and benefit, thereby increasing investments into designated opportunity zones.

The Path Forward

With Republicans back in control of both Congress and the White House and the disruptions of COVID-19 behind us, the stage is set to revitalize the opportunity zone program.

If interest rates continue to soften, new opportunity zone rules could lead to significant investment in communities across the country.

Done properly, an updated opportunity zone program could become a signature policy achievement of the second Trump term—delivering generational change to underserved communities and finally living up to its potential as a great program.