A key piece of legislation aimed at spurring continued investment in opportunity zones could be stalled in Congress until next year.
When the Opportunity Zone program began as part of the 2017 Tax Cuts and Jobs Act (TCJA), tax benefits for individual investors were one of its main selling points. To spur investment in economically distressed areas, the legislation allows for a deferral of capital gains taxes until 2026 for investors in qualified opportunity funds. Those who hold investments for five years will also see their taxable income reduced by 10%, while those who hold investments for five years will also see their taxable income reduced by 10%. Businesses that commit to a 10-year holding period will not have to pay taxes on their qualified earnings until 2047.
Last fall, the House introduced the Opportunity Zone Transparency, Expansion, and Improvement Act (H.R. 5761), which would defer capital gains on qualified opportunity zone investments until 2028, two years beyond the program’s current deadline. It would also reinstate reporting requirements for Opportunity Zones, clear zone designations to exclude non-economically disadvantaged areas and create a special fund to boost public and private investment in the program. By all accounts, the bill, co-sponsored by Republican and Democratic representatives, has bipartisan support and has a high likelihood of eventual passage. However, dysfunction in Congress means the bill may not be approved until after the November election.
“The likelihood of tax legislation is slim this year because we’re right before the election,” said Anya Coverman, president and CEO of the Institute for Portfolio Alternatives, an investment industry advocacy group for portfolio diversification. Anya Coverman said. .
While the House passed a bill earlier this year, the American Families and Workers Tax Cuts Act, it did not include opportunity zone provisions. Coverman noted that another reason the bill has stalled in the Senate is that some Republican senators, including Senate Finance Committee member Mike Crapo (R-ID), would rather delay tax policy changes until 2025, when many provisions of the TCJA will be maturity.
“Also, this is an election year, and Republicans don’t want Democrats to get a huge victory on taxes,” she added.
HR 5761 has bipartisan support, “but there aren’t many windows to pass tax legislation in the current deeply divided Congress,” agreed John Lettieri, CEO of the Economic Innovation Group (EIG). The group is a bipartisan public policy organization focused on the U.S. economy. Lettieri pointed to a similar impasse over child tax credit legislation.
“In a worst-case scenario, I expect Opportunity Zones to be a big part of the discussion next year as tax policy is reset due to the expiration of major provisions of the Tax Cuts and Jobs Act,” he wrote in an email. Back to the forefront.”
Will investors care?
Industry insiders say deferring capital gains taxes is critical for investors considering putting money into opportunity zone funds and for the program to achieve its goal of helping underserved communities. Kelly Ann Winger, CEO of Alternative Wealth Partners LLC, an emerging private company, said the opportunity zones took a long time to clarify given the passage of the TCJA. terms and educating investors on its benefits, the program has still not reached its full potential. Equity Manager. Funds operated by Alternative Wealth Partners invest in opportunities zone projects, including manufacturing, energy and infrastructure businesses.
Winger noted that so far, individual investors have primarily used the Opportunity Zone program to mitigate capital gains taxes because they were unable to conduct 1031 transactions, which are more limited. But now, more private equity and venture capital players are considering the program as it would allow them to pursue long-term returns through a tax-free vehicle.
“I think it’s important that (the program) continues because a lot of time was wasted in the first five years of the program,” Wenger said. “We’re going to start seeing results over the next few years from people who originally invested using this strategy in 2017, as these capital gains tax-free exits start in 2027. I don’t think enough people have all the right information; It’s still less clear about how the program works or what incentives can stack on top of each other.”
Winger added that investors who put money into opportunity zones over the next five years could stand to reap huge returns if Congress extends the program.
A 2023 working paper from the Office of Tax Analysts found that individual investors accounted for about 85%, or 24,000, of the qualifying Opportunity Zone Qualified Investment Reports filed electronically during the 2020 tax year. The office also determined that the median individual investor in qualified opportunity funds had adjusted gross income of approximately $730,000. The average investment amount in these funds is approximately $1 million and the median deferred income is approximately $250,000.
Professional services firm Novogradac & Company LLC reported that qualified opportunity funds raised at least $37.62 billion from the Opportunity Zone program’s inception through the end of 2023. Qualified Opportunity Funds tracked by Novogradac reported that they raised $3.54 billion in equity for 1,461 funds in 2023. Novogradac researchers noted that the majority of funds tracked by the firm (66%) raised less than $10 million, suggesting they are focused on one specific project rather than multiple deals.
Capital Square, headquartered in Richmond, Virginia, is a real estate investment firm focused on raising capital for such single-asset opportunity zone funds. Chief development officer Adam Stifel said RIAs that work with the firm appreciate the ability to conduct due diligence on specific transactions in single-asset funds and understand where they are allocating funds. The firm has raised about $250 million from retail investors for eight single-asset funds. Most of the assets involve multifamily residential developments.
Stiefel said it took investors a while to understand how opportunity zones work. However, “it’s almost become a household word in the tax world now, just like the 1031, and it’s going to take time for the program to take advantage of that. I think most people understand the basics of what an Opportunity Zone is at this point, and the retail side of it The interest level is really high.”
He pointed to the tax benefits of Opportunity Zone investments as an important selling point. So far, Capital Square has completed projects in its Opportunity Zone Fund, stabilized them and refinanced them before the program’s 2026 capital gains deferral sunset. If the program expires in two years, Capital Square could still raise equity from institutional investors and other types of limited partners, but interest from individual investors may wane, Stifel said.
“The importance of 10-year benefits cannot be overstated,” he said. “If we are unable to achieve refinancing distributions before investors’ original capital gains taxes expire, our investor base may slow and interest may diminish.”
Both Stiefel and Wenger believe the extension bill will eventually be adjusted. Wenger noted that because Congress enacted the program during Trump’s administration, he has no reason to erase his legacy by repealing it if he wins a second term. Likewise, if Biden wins in November, Democrats will want to keep investments flowing to underserved areas, she said.
Coverman was more cautious about how things were going. She noted that Congress may be more concerned about spending next year than it was in 2017. That means backers of the Opportunity Zone program must show that its benefits will outweigh the negative budget score from extending the tax break.
“It’s important to maintain bipartisan support for this policy, but that will be done by showing policymakers the positive impact (of the program),” she said. “I think we’re going to have a large and nuanced conversation next year, and we’re in the early stages of that.”
