Bloomberg Tax
Dec. 31, 2021, 9:45 AM

Opportunity Zones in 2021: Taking Stock Four Years On

Libin Zhang
Libin Zhang
Fried Frank

The tax reform and simplification law, formerly known as the Tax Cuts and Jobs Act of 2017, provided significant tax benefits for certain investments made in qualified opportunity zones. Investors have poured billions of dollars into tax-efficient investments over the past four years; some of those involved real estate, while others funded tech startups, cryptocurrency operations, investment managers, and marijuana businesses from coast to Colorado to coast. The opportunity zone program quickly got up and running because, as the Wall Street Journal noted, the program was “designed to be free of complicated rules.”

The opportunity zone program’s tax benefits are available until the end of 2047, but a small tax benefit ceases for investments made after 2021. Like the Hanukkah, Christmas, and Kwanzaa seasons of several recent years, December 2021 is a busy time for some taxpayers who hope to invest by year-end to improve their economic returns over five years by as much as around two percentage points.

Opportunity zone tax practice is not merely about increasing after-tax economic returns for wealthy investors with capital gains. Ever since the opportunity zone community learned on or after May 25, 2020, that George Floyd was killed at the edge of a Minneapolis opportunity zone, diverse panels and commentators have focused on many issues relating to opportunity zone people of color, or OZPOC, particularly for investments in the country’s more multicultural areas such as Florida, California, Texas, and the rest of the southern United States.

Timing is Everything

Federal opportunity zone tax benefits are divided into three parts:

  1. A taxpayer can defer capital gains until Dec. 31, 2026, by making an investment in a qualified opportunity fund, or QOF;
  2. The deferred capital gains are generally reduced by 15% for a QOF investment made in 2019 or earlier and held for seven years, or they are reduced by 10% for a QOF investment made in 2021 or earlier and held for five years; and
  3. After a gain-deferring QOF investment is held for at least ten years, the investment can be sold with all the gains becoming tax-free.

Late 2019 was a busy time for some taxpayers who were advised to make a QOF investment in order to get the 15% gain reduction—instead of 10%. A similar rush is occurring in late 2021 for some taxpayers who hope to obtain the 10% gain reduction.

For example, a taxpayer defers $10 million of capital gains by making a $10 million QOF investment in late 2021. The taxpayer recognizes only up to $9 million—90%—of capital gains in 2026, which are taxed at 2026 tax rates that may or may not include an 8% tax surcharge as proposed in Biden’s Build Back Better Act bill. The taxpayer may be avoiding $2.4 million of tax—23.8% tax rate on $10 million gain—in 2021 and end up paying $2.9 million of tax—31.8% tax rate on $9 million gain—in 2026.

If tax rates go up in 2022 compared to 2021, a taxpayer may be better off paying current taxes on 2021 gains and instead investing 2022 capital gains. Taxpayers that have already made a QOF investment may look into a few ways to recognize some or all of the deferred capital gains in 2021 while still preserving the tax-free exit after ten years. Tax modeling should consider the cost of capital or discount rate, the investment’s expected return, and who will be U.S. president in 2025.

Old and New Census Tracts

Opportunity zones are a subset of the country’s low-income census tracts and certain adjacent census tracts, based on the 2010 census data. The tax code provides that opportunity zones are determined only once based on the 2010 census.

Nevertheless, it appears that some taxpayers and their advisers thought the 2020 census might change the opportunity zone tracts to cover new areas, and they successfully lobbied for some of the census tracts to be expanded in 2020 to include developments like sports stadiums.

However, in Announcement 2021-10, Treasury and the IRS confirmed that opportunity zone boundaries did not change with the 2020 census.

Correction to the Correction

After Treasury and the IRS released the first set of proposed opportunity zone regulations in October 2018, commentators quickly noticed some ambiguity about how the working capital safe harbor of a qualified opportunity zone business—QOZB—interacts with its 70% tangible property test. Treasury and the IRS released a second set of proposed regulations in April 2019, final regulations in December 2019, and a correction to those final regulations on Apr. 6, 2020, that were specifically intended to address the ambiguity, but the confusion may have gotten worse.

After between 15 to 33 months of confusion, depending on when one’s confusion started, Treasury and the IRS on Aug. 5, 2021, released a correction to the correction to the final regulations. It states that a “start-up business” QOZB with a working capital safe harbor plan is not required to meet the 70% tangible property test for up to 62 months. In other words, such a QOZB can own any amount of non-qualifying tangible assets for around five years, such as assets that are acquired from a related party. This approach was unsurprising as it was already a widely held interpretation in the opportunity zone community, albeit without being limited to just start-up businesses.

The double-corrected regulations do not define “start-up business.” It remains to be seen whether Treasury and the IRS will issue a further correction to the correction to the correction to the final regulations that finalized two sets of proposed regulations, or whether the fifth time is the charm.

Land contributed to a QOZB may have problems later, however. Contributed assets are typically valued based on fair market value, while constructed buildings and other purchased assets are valued based on unadjusted tax basis, i.e., cost. A QOZB may have $200 (25%) of contributed land and $600 (75%) of constructed building that satisfies the 70% test. If the land value goes up by 30% to $260, the QOZB fails the 70% test by owning $260 (30.2%) of contributed land and the same $600 (69.8%) of constructed building. Some fund sponsors may use the contributed land structure because they anticipate minimal inflation over the next decades and that the contributed land assets will not significantly appreciate in value before exit.


Many members of the opportunity zone community can remember where they were on Nov. 15, 2017, when the Senate Finance Committee added qualified opportunity zones to the bill that became the Tax Cuts and Jobs Act of 2017. Sponsors, developers, investors, and tax practitioners quickly jumped in to capitalize on the new program and further the development of neighborhoods that were low income in 2010 and certain adjacent areas.

Substantially all law and accounting firms were quick in late 2017 to staff their opportunity zone teams and task forces in a younger and more diverse fashion, knowing that the opportunity zone provisions are a new body of law that does not require much prior knowledge and that the investments will often be made in low income and minority areas with a social impact on the OZPOC community. Most opportunity zone investments are expected to be held for one or more decades and may require further tax advice during the holding period and upon exit, particularly in light of legislative changes such as New York’s decoupling from the opportunity zone program for 2021 and later. Opportunity zone practitioners can all look forward to a hard-earned rest after the Hanukkah, Christmas, and Kwanzaa seasons of 2047, when the opportunity zone program’s tax benefits end.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Libin Zhang is a tax partner at Fried, Frank, Harris, Shriver & Jacobson LLP in the New York office. His mid-2018 research on hot tubs and other opportunity zone hot topics was cited in U.S. Senate Committee on the Budget, Tax Expenditures: Compendium of Background Materials on Individual Provisions, 115th Cong. 2d Sess., S. Print 115-28, at 601 (Dec. 2018).

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