The opportunity zone program, which offers tax incentives for investing in designated low-income census tracts, is poised for a potential second life as Congress addresses the roughly $4.7 trillion in expiring tax cuts and other business incentives contained in the Tax Cuts and Jobs Act of 2017.
If the program survives, investors and community development leaders will be pushing for changes to improve its effectiveness. Their wish list of programmatic improvements includes the following.
Eliminating the vanishing benefits. The program currently asks investors to make largely illiquid investments in low-income census tracts in exchange for four tax benefits:
The fixed Dec. 31, 2026, date has unraveled investors' benefits one-by-one, leaving only the permanent exclusion benefit meaningfully available for investments made closer to the 2026 deadline. Any opportunity zone program extension should ensure every qualified investment realizes the program's full benefits by tying the date that the gain must be recognized to the date the investment is made, rather than a fixed date.
Illuminating the community benefits. Since its creation, the program has driven an unknown amount of money into low-income census tracts and created an unknown number of jobs because reporting requirements were removed from the final version of the Tax Cuts and Jobs Act.
A letter from the Novogradac Opportunity Zones Working Group noted that, according to the Joint Committee on Taxation, $85 billion of investments have gone into opportunity zones, but the community benefit impacts of the program remain opaque.
There should be reporting requirements on the location of opportunity zone investments, the types of businesses funded, and estimates of the jobs created or preserved -- similar to the information reported to the New Markets Tax Credit program. Doing so would strengthen the long-term viability of opportunity zones by giving policymakers clear statistics on the program's utility and community benefits.
Opening the program to existing business operators. The opportunity zone program currently treats tangible property purchased from a related party or contributed by an investor as a nonqualified property. In doing so, it creates a regulatory hurdle that limits the ability of taxpayers already operating in opportunity zones to participate.
Permitting property that a taxpayer substantially improved, regardless of whether the property was acquired from a related party or contributed by an investor, to qualify would better allow these key community stakeholders to participate in the program.
Clarifying the leasing rules. Under the current regulations, if owning and leasing real property is the "active conduct" of a trade or business, then it's eligible to be a qualified opportunity zone business.
However, the regulations provide that "merely entering into a triple-net lease with respect to real property" doesn't constitute an active trade or business, with an example illustrating that a landlord leasing real property to a single tenant under a triple-net lease wouldn't qualify. The questionable rationale for this rule is that such business activity may be inappropriately passive.
Numerous unanswered questions create significant uncertainty for taxpayers considering investing in potential real estate businesses in opportunity zones. The regulations don't define a triple-net lease. It's also unclear whether a business that leases to multiple tenants under triple-net leases would qualify as a sufficiently active business -- surely at some point a property owner has enough tenants with triple-net leases to qualify as an active trade or business.
These uncertainties create barriers to participation in the program and reduce potential investments in these communities. Allowing triple-net leasing or, at a minimum, clarifying the rules around multi-tenant triple-net leasing would unlock the program for difficult-to-develop commercial properties in these target communities.
Targeting disaster recovery. Congress created the Gulf Opportunity Zone after Hurricane Katrina to help affected states recover. It helped expedite capital investment into the hardest-hit areas by increasing the number of census tracts eligible for New Markets Tax Credit investments, increasing bonus deprecation, and increasing tax-exempt bond capacity.
The opportunity zone program could be retooled to drive capital to areas under emergency declaration by allowing affected areas to be designated as temporary opportunity zones. This would allow it to be a flexible tool to address the long-term challenges of disaster recovery.
Offering asset class basis boosts. The program also could be turned into a tool to target priority developments in each state by promoting an additional basis step-up with respect to the original gain for investments made in priority projects.
Allowing states to identify one or more North American Industry Classification System code industries (for example, residential rental businesses in NAICS Code 531110 to promote work force housing) would allow states to tailor the program to address their most pressing investment needs.
Incentives that target community development and investment in low-income communities should remain a priority for our tax system. Our upcoming Congress will have the chance to preserve one such program. Hopefully, congressional leaders will seize the opportunity not just to extend, but also improve the opportunity zone program.