Opportunity Zone Updates
Opportunity Zones have continuously outperformed expectations since the policy’s inception in 2017 with the passing of the Tax Cuts and Jobs Act. Qualified Opportunity Zones are recognized in thousands of low-income areas across all 50 states, the District of Columbia, and five U.S. territories.
What Are Opportunity Zones?
Opportunity Zones are economically challenged communities classified by legislation with the goal of encouraging investment and development in designated areas. Those that invest in Opportunity Zones and adhere to the specific regulations outlined by local government have the potential to reap significant tax savings.
Benefits of Opportunity Zones
Opportunity Zones aim to promote investment in low-income areas, increasing economic activity and job growth. The overall goal of making land improvements, buying, building, and remodeling properties is to make the communities more desirable places to live, work, and invest. Investors who want to temporarily delay tax on capital gains can receive tax benefits from Opportunity Zones as long as they invest those gain amounts in a Qualified Opportunity Fund (QOF) at the right time.
The Opportunity Zones Improvement, Transparency, and Extension Act was presented in the House and Senate in April 2022, with the goal of extending Opportunity Zones until 2028. If passed, this act would restore the reporting requirements from the original 2017 Tax Cuts and Jobs Act. Senators Cory Booker and Tim Scott and House Representatives Ron Kind and Mike Kelly co-sponsored the reform measure. This legislation did not pass by the end of 2022, defying experts’ predictions. Failure to pass the bill means that opportunity zones are set to expire at the end of 2026.
However, in 2023 Congress is contemplating extending the Opportunity Zones policy for at least another two years.
The Novogradac Opportunity Zones (OZ) Working Group was formed to handle technical and administrative challenges that may occur due to the incentive. The OZ Working Group expects 2023 to be another busy year as it actively works on various initiatives and continues to assess and offer insight on new legislation and other OZ-related issues as they arise.
The Tax Cuts and Jobs Act initiative has already exceeded $100 billion in equity flowing into Opportunity Zones since becoming operational. Novogradac-tracked Qualifed Opportunity Funds reported approximately $10 billion in equity investment in 2022, the most since the Opportunity Zones incentive was passed at the end of 2017. This momentum is expected to continue throughout the year, while experts predict seeing much more equity raised in 2023. There are numerous asset classes available for investment, however real estate has been the most popular place for Qualified Opportunity Funds to make investments, with multifamily being the most popular. The country’s ongoing housing shortage is a major contributor to this rise in popularity for multifamily.
This year, Opportunity Zones will face a few hurdles. The markets are not as high performance-wise as they were in the first few years of the program, there is weariness caused by fears of a recession, and investors have fewer capital gains to allocate in the new fiscal year. However, there are several things to look forward to in 2023. There is broad bipartisan support for the policy first presented in 2022, and there are plans to reintroduce the legislation with the hopes of enacting the change in 2023. More education and awareness of the program will also be provided throughout 2023, which will help the program gain even more traction.
Inflation’s Effect on Opportunity Zones
Even when inflation and interest rates raise the expenses of doing business in the real estate market, qualifying Opportunity Zones remain in their prime. Recent trends allude to a positive relationship between inflation and Opportunity Zones.
According to U.S. Labor Department data published on Feb. 14, the annual inflation rate in the United States is 6.4 percent for the 12 months ended January 2023. Inflation is not predicted to slow until the start of 2024. Additionally, while CPI has decreased slightly, there is no indication that inflationary pressures will fade as a primary concern for most investors anytime soon. However, even with historic inflation rates, Opportunity Zones continued to thrive in 2022, and 2023 should be no different.