Trump Order May Improve Opportunity Zone Success Chances
Part three of a three-part series.
By Dave Sorter
The future viability of Opportunity Zones received a big boost on Dec. 11, when President Donald Trump signed an executive order creating a White House Opportunity and Revitalization Council, which will provide economic incentives for investing in the distressed Census tracts designated as Opportunity Zones.
Though Trump did not announce the specific incentives to be provided, he said they would be “massive” and encourage development. He also wanted to send a message to potential investors that investment in Opportunity Zones can certainly be profitable.
The new council includes 13 federal agencies, and will be chaired by Secretary of Housing and Urban Development Ben Carson. A New York Times article quoted a White House official as saying that the agencies already have identified 150 possible actions. For example, the Small Business Administration could earmark loan programs for designated Opportunity Zones.
Carson, in an op-ed written for The Washington Post, drawing on his previous career as a neurosurgeon, stated, “This kind of medicine is precisely what any doctor would prescribe to heal communities where the average poverty rate is 32%, and where the unemployment rate is nearly twice the national average.”
The federal government support could certainly increase Opportunity Zone investment and improve the chances that the program will be successful in redeveloping poverty-stricken areas.
But, unless the program is extended, the benefits might just have an expiration date.
They certainly come with deadlines, some of which are coming up pretty quickly.
“If you want to reap the full tax benefits, you would have to invest in Opportunity Zones by the end of next year,” said Darin Mellott, director of research-America for CBRE. The story behind that statement: Opportunity Zones were designed to attract investors by allowing them to defer capital gains taxes for a certain amount of time – and even eliminate a portion of the burden for those who hold the investment long enough.
So, investors will get a 15% tax break if they hold an Opportunity Fund investment for seven years; 10% if it’s held for five years. However, the tax break ends on Dec. 31, 2026 – the same day as all those tax cuts passed in the bill expires. So, the investor must pay the deferred capital-gains taxes in April 2027 at the latest (except for the 10 or 15 percent credited because the Opportunity Fund investment was held for five or seven years).
What that means is that to take full advantage of the seven-year, 15% tax break, your Opportunity fund investment must have closed on or before Dec. 31, 2019. Those who are satisfied with the five-year, 10% incentive can wait until Dec. 31, 2021.
That’s assuming Congress does not act to extend the 2026 deadline. “If they are really successful, you could see some movement toward extending Opportunity Zones,” Mellott said. But, he added, the Opportunity Zone section of the tax reform bill is not inextricably tied to the tax cuts that were also included in it.
In other words, if the tax cuts are made permanent, as many Republican members of Congress would like, that would not automatically mean Opportunity Zones also would be made permanent. The corollary also holds true: The new, Democratic-majority House of Representatives makes it unlikely the tax cuts would be made permanent, but it could vote to extend the deadline of the more bipartisan Opportunity Zone legislation.
But, as it stands now, those who invest in Opportunity Funds on Jan. 1, 2022 or later would gain capital-gain tax deferral only – no break on the gains used to invest in the funds. Still, those who hold their investments for 10 years or more won’t have to pay any capital gains tax on the increase in value a property accrues after it is redeveloped. That deadline isn’t until Dec. 31, 2047.
The key phrase for any future speculation is “depending on performance.” If development and redevelopment in Opportunity Zones result in a Renaissance of currently blighted neighborhoods, more and better jobs, and good ROI for Qualified Opportunity Fund investors, expect even more investment, and expect Congress to extend deadlines. If it turns out that Opportunity Funds are helping only Opportunity Zones that have already started gentrifying, then the idea will likely fade away by 2026.
For now, however, the industry is optimistic.
Part 1: What are Opportunity Zones and Where are They Located?
Part 2: Impact Expected to be Localized