On April 8, the Department of the Treasury and the Internal Revenue Service (IRS) announced updates to the Qualified Opportunity Zone (QOZ) program, which provides tax incentives for investors funding improvements to distressed communities. The original initiative, known as OZ 1.0, expires on December 31, 2026. OZ 2.0, which includes several changes to the requirements and protocol, begins January 1, 2027.
Created in the 2017 Tax Cuts and Jobs Act, opportunity zones are census tracts selected by state governors according to specified criteria indicating dire need, then confirmed by the Secretary of the U.S. Treasury. If individuals invest realized capital gains (the profit earned upon the sale of taxable assets, such as stock shares, digital currency, collectibles, or real estate) into improvement projects in a designated tract, they can defer or eliminate taxation on those gains.
Assistance To Struggling Communities
Since the inception of the program, 8,764 areas have received this status and used tens of billions of private sector investment money. Examples of supported projects include Section 533 Housing Preservation Grants (HPG), which facilitate the rehabilitation or renovation of homes, and the ReConnect Pilot Program, which contributes to broadband installation.
Investors found ways to be delightfully creative in one story found on IW Features. When Twin Falls, Idaho, residents Lisa and Dave Buddecke visited a food hall while vacationing in Denver, Colorado, they embraced the open eatery concept for their own town.
An economic development consultant at the time, Lisa was composing a newsletter about Opportunity Zones, and after seeing they lived in one, the Buddeckes bought a well-worn 1926 building and lovingly restored the historical gem.
In a poignant turn, one of the tenant restaurants is run by Chan Chan, a hardworking immigrant from Burma who was able to buy his first house in the United States thanks to his small business in the food hall.
Advantages To Investors
Although the IRS has not released figures on the total tax savings to investors, the potential amount is enormous. Investing realized gains in a Qualified Opportunity Fund (QOF), the investment vehicle that facilitates improvement measures, provides tax benefits that increase with the amount of time the money is left in the fund.
After ten years, 15% of the original investment may be considered non-taxable, and further gains earned while in the QOF can be entirely tax-exempt. With well over $100 billion estimated by the Department of Housing and Urban Development (HUD) to have been invested thus far, the total savings to investors are sure to be substantial.
OZ 2.0 Changes
Although much of the basic structure will remain, OZ 2.0 contains multiple reforms. The most salient are listed in a summary on the HUD website.
Most notably, the new program will be permanent, albeit with ten-year cycles of census tract and other reassessments, beginning in 2027.
At present, 8,764 tracts are active, but their OZ status expires at the end of the year. A new number and list are currently being determined. HUD estimates the new number at around 6,500.
The governor nomination criteria have been adjusted. Under OZ 1.0 rules, governors could nominate up to 25% of eligible low-income community (LIC) tracts, but several caveats existed. Under OZ 2.0, no further stipulations exist.
The “low-income community” definition has also been tightened. Median family income (MFI) must now be ≤ 70% of area MFI, or poverty rate must be ≥ 20% and MFI ≤ 125% of area median. This increases the likelihood that the most needy will have access to funds.
Rural areas will likely see the greatest increase in benefits, as these areas are the targeted demographic for the next cycle. Any area other than a town with more than 50,000 residents, and any urbanized area contiguous to such a town, qualifies as rural. Investors in these areas will be given a 30% step-up in basis after ten years, as well as a 50% substantial improvement threshold (instead of 100%) for qualified rural opportunity funds (QROFs).
How To Get Involved
If you hope to be an investor or to request funds to help your area, you can learn how to get started on the IRS website. The program is somewhat complex, but you can find answers to common questions on the FAQ page. The opportunity is there for struggling communities, as well as for individuals hoping to invest in something meaningful while lowering their tax burden.