In April, bipartisan coalitions in the U.S. Senate and House of Representatives introduced the Opportunity Zones Transparency, Extension and Improvement Act. The legislation seeks to introduce a number of reforms to the “opportunity zone” tax incentive, which was first created by the 2017 Tax Cuts and Jobs Act and was intended to encourage long-term investment in low-income areas throughout the country.
If passed into law, the new legislation could spur economic development by making new and existing opportunity zone investments more attractive and by addressing concerns that the program has sometimes failed to direct investments to the communities most in need. With a number of opportunity zones in southwest Missouri, including areas along most of Interstate 44 through Springfield and parts of downtown, the legislation could be expected to have a local impact, in addition to national.
Opportunity zones are census tracts that consist mainly of low-income communities that are designated by states or the secretary of the Treasury as eligible for the opportunity zone tax incentive by investment in a qualified opportunity fund. The funds must invest in qualified opportunity zone property, which must meet certain criteria designed to steer capital toward the kinds of investments that will result in substantial economic development, such as locating businesses in opportunity zones or making improvements to real property in opportunity zones.
The opportunity zone tax incentive allows a taxpayer who would otherwise have to pay capital gains tax upon, for example, the sale of appreciated stock or real property, to take the proceeds from such a transaction and invest them in a qualified opportunity fund. The tax is thereby deferred, and, at five, seven, and 10-year holding periods, reduced by means of a step-up in the taxpayer’s basis until, in the case of an investment held for 10 years, it is eliminated.
From the standpoint of economic development and meeting the needs of underserved communities, a few features of the new legislation stand out.
First, the legislation extends the deferral period, set to expire at the end of 2026, until the end of 2028. It also reduces the seven-year holding period to six years.
These changes should have the effect of encouraging new opportunity zone investments since new investors could, if the legislation is enacted this year, potentially qualify for the benefits attainable at the five and seven-year holding periods.
For those who made early investments after the passage of the 2017 legislation and have been considering an exit, the legislation provides an incentive for such investors to continue to hold their investment, as it may allow them to eliminate their tax liability by meeting the 10-year holding period.
The proposed legislation also addresses a long-standing concern regarding opportunity zones, namely that not all designated census tracts are truly low-income. It does this by phasing out census tracts that have a median income greater than 130% of the national median family income, and by using updated census data from 2020, which may phase out from the program some census tracts that no longer meet the low-income qualifications. The effects of these changes will be to direct opportunity zone investments into areas that have a greater need for an influx of capital.
Since the bill’s introduction in Congress, it has so far only been referred to committees in each chamber. In a midterm election year, it is unclear if bipartisan opportunity zone legislation will be enough of a priority to have a chance at passage, but, if enacted, the Opportunity Zones Transparency, Extension and Improvement Act could prove a useful aid to economic development, more focused on the communities that were originally intended to benefit from the creation of the zones.
Adam Holmes is an attorney at Spencer Fane LLP. He can be reached at
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