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The Opportunity Zone (OZ) program, part of the Tax Cuts and Jobs Act of 2017, has delivered on its promise, unlike some other tax incentive programs. Now, with its planned expiration date approaching, the program’s future is uncertain.
According to a CoStar analysis, OZs have helped achieve completion rates for low-income household multifamily units at more than twice the national pace before the program. About 68,000 more apartment units opened in OZs than before the tax breaks started.
Those additional units have an estimated value of more than $18 billion, based on CoStar’s average sale price per unit.
In 2017, OZ apartments comprised 12% of all units in the U.S. By 2018, it grew to 14%, then 15% in 2019 and 2020, and 18% in 2021. Currently, 23% of apartments under construction are in opportunity zones.
The availability of new apartment units in OZs rose 151% to 143,219 between 2017 and 2024. That’s more than double the 63% gain to 807,206 units across all U.S. markets.
Under the program, there are 8,764 OZ communities across all 50 states, the District of Columbia, and five U.S. territories, according to the IRS. The attraction for investors was the ability to defer tax on capital gains if they put that money into a Qualified Opportunity Fund.
The tax benefits depended on the amount of time holding a QOF investment. Five years and the basis of the QOF investment increased to 10% of the deferred gain. At least seven years and the basis increased to 15% of the amount. Ten years or more and the investor could adjust the basis to fair market value on the date the QOF was sold or exchanged.
Novogradac & Co., a San Francisco-based accounting, valuation and consultancy firm, tracked 2,033 qualified funds by the end of 2024. Of those, 1,611 reported a specific raised dollar amount — a total of more than $40 billion, according to CoStar.
Critics say there are necessary changes to the program. Andrew Weiner and Joshua Becker of Pillsbury Winthrop Shaw Pittman wrote that the law and regulations present structural flaws that make using the program difficult and cumbersome for many taxpayers.
They claim that the rules “unintentionally favor small, closely held funds and family offices.” Also, if a project fails or is delayed, there are few ways of preserving tax benefits. They also suggested expanding the program to allow contributions of regular cash.
Reportedly, the program has new backers in D.C., and some expect to push a 2.0 version. However, given the turmoil in the capital, any legislation could be challenging to pass.
Time is running out, and the program is set to end by December 31, 2026.
The Economic Innovation Group used HUD data and found that the OZs caused a large — and still rising — increase in housing supply in designated communities.
A study by the group also estimated that the cost per housing unit was “extremely low compared to other housing incentives.”
It remains to be seen whether a new version will be passed, and what changes will be made to address the criticisms and challenges faced by the current program.
