GOP Tax Bill Opens Investment Prospects for Opportunity Zones

The Trump administration’s massive tax bill creates new prospects for opportunity zones by enhancing the income tax benefits and making the incentive permanent. But even though the full impact of the so-called OZ 2.0 benefits doesn’t apply until January 2027, investors and sponsors should start planning now.

Investment Period Control

Investors need to invest in a qualified opportunity fund on or after Jan. 1, 2027, to participate in OZ 2.0. They generally have 180 days after the recognition date (for federal income tax purposes) of an eligible gain to make a timely investment. OZ 2.0 investors should ensure that some portion of the 180-day investment period will occur on or after Jan. 1, 2027.

Understanding regulations about the flexibility of the start date for the 180-day investment period can help with planning. This flexibility is possible when a passthrough entity generates the eligible gain and allocates it on a federal Form K-1 to the investor, or the eligible gain is subject to the installment method rules under Section 453 of the tax code.

There are ample planning opportunities to structure some part of the 180-day investment period to take place in 2027 or sometime later. An investor allocated an eligible gain (or portion of one) from a passthrough entity that isn’t being invested into a qualified opportunity fund by the passthrough entity has 180 days to timely invest in it as of the last date of the passthrough entity’s taxable year in which the gain occurred.

However, the investor can elect either the date that the passthrough entity generated the eligible gain or the return due date (without extensions) for the passthrough entity’s federal income tax for the taxable year in which the eligible gain was generated.

The OZ regulations are flexible for an eligible gain subject to the installment method. This is where an eligible gain comes from a disposition of property (not including property such as inventory) where the investor receives at least one payment after the close of the taxable year in which the disposition occurs.

In such a case, the investor can begin the 180-day investment period on the date the payments are received or the last date of the taxable year in which the investor would recognize gain under the installment method.

Investors holding assets directly or through a passthrough entity, and considering selling those assets, should consider the following alternatives:

• Make the passthrough entity wait until 2026 to sell
• Sell now, but structure the sale so some payment will occur after the 2025 tax year and qualify for the installment method

Though it can be risky, an investor can transfer the asset to a passthrough entity before any contemplated sale to take advantage of the regulations’ flexibility.

New OZ Advocacy

The OZ 2.0 process for redesignation will be similar to the one from 2018, when each state could nominate 25% of the low-income communities in its borders, and the definition of a low-income community has been changed to be more restrictive.

States can start nominating population census tracts on July 1, 2026, for a 90-day period with an opportunity to extend such date by 30 days. It’s important to check to see what population census tracts in a state will satisfy the new definition of a low-income community.

It’s a good idea to start the advocacy process as soon as possible to educate economic development officials on the economic potential for available tracts. Picking the tracts could be a competitive process and failure to get a good potential tract nominated might be disastrous because the redesignation process only takes place every 10 years.

Tangible Property Rules

A qualified opportunity zone business must meet certain requirements, including that at least 70% of its tangible property owned or leased must be qualified property.

Under OZ 1.0, tangible property couldn’t qualify if a qualified OZ business leased or acquired it before Dec. 31, 2017. For OZ 2.0 investments, this date changed to Jan.1, 2027, and resets every 10 years.

Having some tangible property that isn’t qualified is fine, but an opportunity zone business expecting to be funded from a qualified opportunity fund under OZ 2.0 needs to be careful where it has acquired or leased tangible property before 2027. In some cases, the business will want to delay the lease or acquisition to after 2026.

An acquisition-rehabilitation real estate project, for example, might have difficulty satisfying the 70% test if the project planned to acquire the building before 2027. A real estate project involving the acquisition of unimproved land prior to 2027, however, could satisfy the test if the vertical improvements are significant and take place after 2026.

Folks in the OZ area have been concerned about a potential slowdown in OZ investment activity in 2026 with respect to the transition period between OZ 1.0 and OZ 2.0. This may be the case, but there is a lot to do to get ready for Jan. 1, 2027.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Marc Schultz is a partner at Snell & Wilmer whose practice is concentrated in federal, local, and state taxation matters.

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