Will Opportunity Zones be Extended? The QOZ Extension Act
April 7, 2023
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Everything You Need To Know About The QOZ Extension Act
If you’ve read our article on Qualified Opportunity Zones, you know all about the benefits of investing in this program for landlords and communities at large. The original Qualified Opportunity Zone Act of 2017 sought to increase investment in economically distressed neighborhoods by setting up tax incentives for investors in these communities to drive economic activity to the area. QOZs are located across the country in specific areas designated by the Act, and there are thousands of census tracts qualified as such.
Through this program, landlords investing in a QOZ must make improvements to increase cost basis, or the value of the property. By doing so, they can defer paying capital gains taxes on these investments.
Since 2017, however, there have been several proposed changes to the Act. Although the most recent proposed bill in 2022 did not end up passing, many investors predict that similar changes may still be in the works for this program. This article will discuss this bill and what landlords interested or involved in this program should be ready for in the future.
Opportunity Zones Transparency, Extension, and Improvement Act
The original Qualified Opportunity Zones program was passed in 2017 as part of the Tax Cuts and Jobs Act. Since 2017, there have been several ideas to extend the program and its benefits.
In fact, last year, a bill was proposed to do just that. The Opportunity Zones Transparency, Extension, and Improvement Act (or QOZ Extension Act) was a bipartisan/bicameral bill introduced on April 7, 2022. Its aim was to improve the tax benefits offered by the original Act and refine the target on low-income areas that the program was intended to help. You can read a summary of the bill here, from the senators who proposed it, or read the full bill. The QOZ Extension Act did not end up passing in 2022, but its proposed changes still have support from both parties and are likely to return in some shape or form in the future.
Here are some of the changes it would have created:
- Extend the capital gains deferral offered by the original program. As you’ve read, the original QOZ Act allowed investors taking advantage of this program to reinvest in a Qualified Opportunity Fund (QOF) and defer their capital gains until the end of 2026. The Extension Act would have extended this to 2028 (deferring taxes to April 2029). For landlords, this would have meant more time and flexibility to develop projects and refinance properties, especially since the impacts of the COVID-19 pandemic may have prevented some landlords from using the program.
- Cost basis step up – The original Act allowed a 10 or 15% increase in cost basis of capital gains if investors maintained their projects for at least 5 or 7 years, respectively. However, investors using this program in more recent years (after 2019) won’t be able to hold their investments that long before the 2026 cut-off. The extension would fix this problem, allowing more time for new landlords to get started with the program.
- Create QOF feeder funds, or “a fund of funds” which can invest in other QOFs. This would allow established QOFs to invest in other funds, helping larger investors fund smaller projects and get financing to smaller communities that need it.
- Eliminate higher income census tracts among the ~8,800 listed as qualified opportunity zones to help revive focus on lower-income communities.
- Add reporting requirements to increase transparency (e.g., requiring investors to report breakdowns of their investments, units, and employees).
What Is the Future of the Qualified Opportunity Zone Program?
Despite investors’ and experts’ predictions, the QOZ Extension Act did not pass by the end of 2022. This means, for now, its benefits will expire as planned in 2026. Investors can elect to defer capital gains tax on Opportunity Zone properties through December 31, 2026 (to be filed in April 2027 for the previous year).
However, experts still predict that Congress will extend the Opportunity Zones program for several more years in 2023. This is because there was wide bipartisan support for the bill when it was first proposed in 2022, and its supporters in the House and Senate are still hoping to pass some version of the new legislation in 2023.
Additionally, it’s likely that investments made using this program will look different this year due to changes in the housing market. Fears of a housing recession have investors acting more cautiously than in previous high-performing years of the past. Many investors are waiting to see what happens with the housing and rental markets before jumping into new investments, and some investors already involved with the program have fewer capital gains to report. Much remains to be seen about how the QOZ program and its participants will adapt to new circumstances.
The bottom line on QOZs for now is to stay posted on possible updates to the program in the future. Although the original updates posed in 2022 did not pass, its broad support suggests a reappearance at some point in the future. Stay tuned to our blog for new information about how this program could benefit you or a community you’re looking to invest in.