2025 Opportunity Zones Legislation Report

With a new admin­is­tra­tion due to take over in a few months there may be sev­er­al (poten­tial bipar­ti­san) changes in the oppor­tu­ni­ty zone. The “Post Elec­tion Spec­u­la­tion” is emerg­ing in many aspects of the gov­ern­ment and cer­tain­ly there is inter­est in poten­tial exten­sion, mod­i­fi­ca­tion, and fine tun­ing of the Oppor­tu­ni­ty Zone leg­is­la­tion.

Novem­ber 12, 2024

By Al DiNi­co­la, AIF®, CEPA™
DST 1031 Spe­cial­ist
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC Mem­ber of FINRA/SIPC

Overview of Recent Leg­isla­tive Devel­op­ments

Since the adop­tion of the Oppor­tu­ni­ty Zones pro­gram, designed to stim­u­late invest­ment in eco­nom­i­cal­ly dis­tressed com­mu­ni­ties, there has been sig­nif­i­cant cap­i­tal invest­ed. Experts esti­mate $84 bil­lion has entered the mar­ket­place for the OZ pro­gram.

The pro­gram has entered an inter­est­ing peri­od as the date of the pro­gram (as orig­i­nal­ly passed) is caus­ing some investors to press pause in the invest­ment. A few of the rea­sons (from a recent sur­vey) respon­dents cit­ed uncer­tain­ty about tax leg­is­la­tion and the future of OZ pro­gram.  The defer­ral peri­od to Decem­ber 31, 2026, is viewed as too short by some investors. Some investors cite the lack of cap­i­tal gains that are required to be invest­ed in the OZ. The hold­ing peri­od of 10 years and the fea­si­bil­i­ty of doing real estate deal at this time came up also caus­ing some investors to pause.

The pro­gram is enter­ing a new phase of poten­tial exten­sion and mod­ern­iza­tion, fol­low­ing the 2024 elec­tion.  The elec­tion of Don­ald Trump to a sec­ond Pres­i­den­tial term, cou­pled with a Repub­li­can major­i­ty in both the Sen­ate and House of Rep­re­sen­ta­tives, will shift the leg­isla­tive land­scape in 2025. This is cre­at­ing opti­mism for extend­ing and enhanc­ing the OZ pro­gram for cer­tain pro­po­nents.

Elec­tion Out­come and Leg­isla­tive Impact

When OZs first were intro­duced, it was a bipar­ti­san issue. Pri­or to the last elec­tion there was a con­cern for the pro­gram if the GOP was not back in the White House. Now that the elec­tion results are in, the future of Oppor­tu­ni­ty Zones is very favor­able. One of the inter­work­ing of the Con­gress is a process called bud­get rec­on­cil­i­a­tion.  There is a strong like­li­hood of extend­ing the tax defer­ral peri­od (with the Repub­li­cans back in Con­gress), and pos­si­bly mak­ing parts of the pro­gram per­ma­nent in new tax leg­is­la­tion.  Indus­try dis­cus­sions indi­cate that a com­pre­hen­sive leg­isla­tive pack­age may be intro­duced as ear­ly as 2025, aligned with broad­er tax reform efforts. Some on Capi­tol Hill are call­ing it the “Super Bowl of Tax.”

 Two Cat­e­gories of OZ Leg­is­la­tion

 1) Exten­sion of Cur­rent OZ Incen­tive

The first cat­e­go­ry involves an exten­sion of the exist­ing Oppor­tu­ni­ty Zones incen­tive, as defined by the Oppor­tu­ni­ty Zones Trans­paren­cy, Exten­sion, and Improve­ment Act. This bill intro­duced in the House has sup­port from the Sen­ate. Cru­cial­ly, this pro­posed leg­is­la­tion aims to extend the cur­rent OZ pol­i­cy by two years.

Includ­ed in this bill:

• Extend­ing the tax incen­tive for two years by push­ing the defer­ral date from 2026 to 2028.
• Expand­ing the report­ing require­ments.
• De-cer­ti­fy­ing a num­ber of high-income Oppor­tu­ni­ty Zones, esti­mat­ed to be rough­ly 75–100 tracts out of the cur­rent 8,764. (Note: cur­rent invest­ments would be grand­fa­thered in.)
• Allow­ing for fund of funds, so that Qual­i­fied Oppor­tu­ni­ty Funds could invest direct­ly in oth­er QOFs.
• Estab­lish­ing a State and Com­mu­ni­ty Dynamism Fund, pro­vid­ing $1 bil­lion in tech­ni­cal assis­tance to local com­mu­ni­ties. This leg­is­la­tion would pro­vide con­ti­nu­ity for investors already engaged in the pro­gram, while also encour­ag­ing new invest­ments.

 2) Renew­al of OZ Incen­tive with New Cen­sus Tract Des­ig­na­tions

The sec­ond cat­e­go­ry of leg­isla­tive focus involves a renew­al of the Oppor­tu­ni­ty Zones pro­gram, also referred to as an “OZ 2.0” ini­tia­tive. This renew­al would allow for the des­ig­na­tion of a new slate of cen­sus tracts based on updat­ed 2020 Cen­sus data.

The orig­i­nal des­ig­na­tions were made quick­ly, with lim­it­ed data, lead­ing to some areas being des­ig­nat­ed that may no longer meet the cri­te­ria for eco­nom­ic dis­tress. A renew­al would pro­vide an oppor­tu­ni­ty to cor­rect these issues and ensure that the pro­gram bet­ter tar­gets tru­ly under­served areas. This redes­ig­na­tion could also allow gov­er­nors more flex­i­bil­i­ty in select­ing zones, poten­tial­ly includ­ing addi­tion­al incen­tives for rur­al and high-need areas.

 Some ear­ly OZ 2.0 con­cepts include:

• Autho­riza­tion of new Oppor­tu­ni­ty Zones for a peri­od of 8–10 years begin­ning in 2026 or 2027.
• Addi­tion­al incen­tives for afford­able hous­ing and job cre­ation.
• The abil­i­ty for after-tax dol­lars (non-gains dol­lars) to par­tic­i­pate in the 10-year exclu­sion ben­e­fit.
• Fund of funds con­cept. (Allow­ing QOFs to invest direct­ly into oth­er QOFs.)
• A rolling defer­ral peri­od, e.g. 5 years.
• Poten­tial per­ma­nence of the incen­tive, with new cen­sus tracts des­ig­nat­ed every 8–10 years.

 It’s impor­tant to note that these are just pre­lim­i­nary ideas that are just start­ing to be devel­oped by var­i­ous OZ indus­try groups. They are sub­ject to change in the com­ing weeks and months.

Focus on Rur­al Devel­op­ment and Small Busi­ness­es

There is a strong empha­sis on boost­ing rur­al areas through a State and Com­mu­ni­ty Dynamism Fund, aimed at sup­port­ing small to mid-sized busi­ness­es with­in Oppor­tu­ni­ty Zones.

 Long-Term Invest­ment Strate­gies and Rein­vest­ment Flex­i­bil­i­ty Pro­posed changes may include allow­ing rein­vest­ment of cap­i­tal gains before the 10-year hold­ing peri­od, cre­at­ing a ‘super Roth’-like vehi­cle for long-term growth.

Enhanced Trans­paren­cy and Impact Report­ing Stricter impact report­ing require­ments are expect­ed, focus­ing on demon­strat­ing tan­gi­ble com­mu­ni­ty ben­e­fits to main­tain pro­gram cred­i­bil­i­ty and bipar­ti­san sup­port.

 Final com­ments on poten­tial leg­isla­tive update

 The leg­isla­tive out­look for Oppor­tu­ni­ty Zones has bright­ened sig­nif­i­cant­ly post-elec­tion. With a sup­port­ive polit­i­cal envi­ron­ment, there is strong momen­tum for extend­ing the pro­gram and intro­duc­ing reforms to increase its acces­si­bil­i­ty and impact. Key devel­op­ments are antic­i­pat­ed in 2025 dur­ing bud­get rec­on­cil­i­a­tion, a process that is like­ly to result in major tax leg­is­la­tion that could be signed into law by Pres­i­dent Trump in the sec­ond half of 2025.

Investor Dis­clo­sure:

DST’s (Delaware Statu­to­ry Trusts) are for accred­it­ed investors only.  Please us for addi­tion­al details on how a DST may be a solu­tion to your §1031 and §1033 Exchange and com­pli­ment your finan­cial objec­tives. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

DST News would like to acknowl­edge the con­tri­bu­tion of con­tent by Four Springs Cap­i­tal, Madi­son Cap­i­tal Group and Cap­i­tal Square to the arti­cle.  These com­pa­nies are Delaware Statu­to­ry Trust (DSTs) spon­sors that pro­vide replace­ment solu­tions for finan­cial advi­sors to con­sid­er for §1031 and §1033 exchanges.

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