The 2017 tax reform legislation created new rules governing the taxation of capital gains stemming from investments in qualified opportunity zones.
The qualified opportunity zones program is intended to encourage investment in designated low-income areas. Taxpayers are eligible to defer gain recognition and, instead, the gain is included in income in the year that includes the earlier of (1) the date the investment is sold or exchanged or (2) Dec. 31, 2026.
Recent proposals would extend the opportunity zone rules and expand the availability of the deferral program so that gain deferral would be extended through Dec. 31, 2028. Further, the existing holding period requirement would be reduced from seven years to six years.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about proposals to extend the opportunity zone incentives.
Below is a summary of the debate that ensued between the two professors.
Byrnes: Many of the tax incentives associated with the opportunity zone program have already begun to phase out — and the full tax deferral benefit is unavailable to new investors at the precise time when people may have renewed interest.
This bill would extend the tax deferral potential through 2028 and reduce the holding period requirement so that more taxpayers become eligible to participate in this valuable program. These extensions make perfect sense given the time it’s taken to develop the rules in the first place.
Bloink: This new legislation would add significant complexities to an already complicated tax deferral regime. Notably, opportunity zone tracts would be required to use the more recently available 2020 census data — where many initially relied on older census data to qualify in the first place. That would create an administrative nightmare as many OZs would be targeted for early sunsetting — a problem that could be especially damaging for smaller opportunity zone funds.