Now that the Dec. 31, 2021, funding deadline has passed to take advantage of the 10% basis step-up provision (assuming a five-year hold), some skeptics will argue that the economics of the federal opportunity zone (OZ) program have been diminished. Not so.
The long-term benefits of the OZ program have not changed for investors, municipalities, and disadvantaged communities alike. We encourage you to recommend OZ investing for clients who have substantial gains from the sale of appreciated tech stocks, family businesses, real estate, stock portfolios, and even cryptocurrency and collectibles — especially if those clients are cause-oriented and/or need tax strategy help. Even though the Dec. 31, 2021, deadline has passed, the OZ program still offers CPAs and their clients the opportunity to defer tax on 2021 capital gains for up to five years into the future.
Contrary to how it is often portrayed in the media, the OZ program is not just a game the wealthy can play for tax deferral (aka “avoidance”), and it’s not just about real estate.
As we’ll discuss shortly, the OZ program has already had a positive (and measurable) impact on job creation, home values, and entrepreneurship in many of the 8,700 nationwide census tracts designated for OZ investment. Most OZ tracts are in economically challenged areas often bypassed by traditional real estate developers, retailers, and even place-based government programs.
Before looking closer at the investment, tax, and society-benefiting possibilities of the OZ program for your clients, let’s review the original purpose of the OZ program and look ahead to its future benefits.
While often portrayed as a last-minute addition to the 2017 law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, the OZ program was conceived under the Obama administration and finally passed in a bipartisan fashion in late 2017. The OZ program was designed to encourage taxpayers with high concentrations of wealth in tech stocks, family businesses, real estate, stock portfolios, and alternative assets to liquidate those assets to help fund development in economically challenged areas. In return for making a long-term commitment to those areas, investors receive multiyear deferral and ultimately tax exemption on their post-reinvestment appreciation.
That remains the case today. Regardless of what each investor’s motivation is for participating in the OZ program, it has already had a measurable positive impact in all 50 states (as well as U.S. territories).
According to national CPA firm Novogradac, more than $20 billion in equity dollars had been invested in the OZ program as of September 2021 (“Novogradac Opportunity Fund Tracking Surpasses $20 Billion,” Novogradac website (Oct. 22, 2021)). This is a conservative figure since it generally excludes “captive” OZ funds formed by family offices and high-net-worth taxpayers. Furthermore, these projects have a “capital stack” that is generally leveraged at a 4:1 ratio or greater. So, the total project funding is easily closer to a range of $80 billion to $100 billion — already meeting the White House’s targeted funding through 2027.