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Bipartisan legislation referred to the House Ways & Means Committee on September 27, 2023 would improve Opportunity Zones and push back the tax incentive’s deferral date by two years, from 2026 to 2028.
Co-sponsored by U.S. Representatives Mike Kelly (R-PA), Daniel Kildee (D-MI), Carol Miller (R-WV), and Terri Sewell (D-AL), the Opportunity Zones Improvement, Transparency, and Extension Act (H.R. 5761) includes new mandates that would reform and improve the Opportunity Zones tax incentive.
It is very similar to bicameral legislation introduced in the last session of Congress.
Specifically, this new legislation would require the following:
- Extending the tax incentive for two years. December 31, 2026 is the current deferral date. This is also the final date on which an investor can realize a capital gain that is eligible for investment into a Qualified Opportunity Fund. The legislation would push this date back by two years, to December 31, 2028.
- Re-activating the 10% basis step-up. Those who had invested gains into QOFs at least five years prior to the deferral date were eligible for a 10% basis step-up, essentially eliminating tax liability on the reinvested gain by 10%. This effectively expired on December 31, 2021. But because the new legislation extends the deferral period to December 31, 2028, investments made by December 31, 2023, would now qualify for the 10% basis step-up. Additionally, the law currently allows for a 15% basis step-up for QOF investments made 7 years prior to the deferral date, which effectively expired on December 31, 2019. Under the new legislation, QOF investors who made their qualifying investments on or before December 31, 2021, could now qualify for the additional 5% step-up.
- Expanding reporting requirements that would provide much-needed transparency into how well the Opportunity Zone incentive is working.
- De-certifying high income Opportunity Zones. The legislation calls for the early sunsetting of the small percentage of Opportunity Zones that have median family income at or above 130 percent of the national median family income. Additionally, states would have the opportunity to designate new census tracts to replace any that are disqualified early.
- Allowing for fund of funds. Currently, a Qualified Opportunity Fund is not permitted to invest into other Qualified Opportunity Funds. This legislation would unwind this restriction, allowing for “fund of funds,” which would potentially help smaller communities and projects raise equity more easily.
- Establishing a State and Community Dynamism Fund. Flexible grants would provide operating support and technical assistance to underserved communities.
These proposed changes provide welcomed reforms to the current incentive. The legislation would require expanded informational reporting by Qualified Opportunity Funds, similar in nature to the reporting requirements originally included in the Investing in Opportunities Act, but removed from the final OZ statute that was passed as part of the 2017 Tax Cuts and Jobs Act.
“Opportunity Zones have breathed new life into neighborhoods and Main Street businesses that have not seen private investment in years, all without spending a single taxpayer dollar,” Rep. Kelly said. “This legislation builds upon the successes of Opportunity Zones and now adds new guidelines to make sure this program can benefit more communities for years to come.”
Co-sponsor Rep. Kildee agrees. “The Opportunity Zones program has helped provide economic development tools to grow communities in Michigan,” Rep. Kildee said. “But the Opportunity Zones program needs improvements, as industrial sites like Buick City in my hometown of Flint, were overlooked by it. I’m proud to work with Congressman Kelly on this bipartisan legislation to create new economic opportunities for mid-Michigan, helping revitalize former industrial sites to grow our economy and strengthen our neighborhoods.”
Other sponsors of the bill added in November include U.S. Representatives Nicole Malliotakis (R-NY), Guy Reschenthaler (R-PA), Jefferson Van Drew (R-NJ), and Vern Buchanan (R-FL).
The bill is expected to be introduced in the U.S. Senate before year-end.
The Opportunity Zones industry is hopeful that the provisions of this OZ bill could be packaged into a larger year-end tax extenders bill.