Opportunity Zone Funds: Who Really Benefits?

When the concept of opportunity zones was created in the 2017 tax cut bill, there were hopes that investments in those zones through opportunity zone funds would yield two benefits: tax advantages for investors and economic improvements for local communities. 

It’s too early to tell if those intentions will be fulfilled, but there are multiple indications that tax cuts for investors, including well-connected ones, rather than community impact, is taking precedence.

Case in point: the Treasury’s new proposed draft form to collect data about opportunity zone funds. 

New IRS Proposed Form 8996

The new proposed Form 8996 requires an opportunity zone fund to disclose the census tracts of its investments, the values of its assets along with the Tax IDs of the businesses in which it has an interest. It does not require the exact addresses of those properties or businesses, the closing dates for investments or the potential impact of these investments on their host communities.

Moreover, the proposed form does not require that any of its information be made public — information that potential investors may want to have along with members of host  communities.

“This is certainly a departure from typical accountability for federal community development programs,” says Brady Meixell, research analyst at the Urban Institute. “As long as there’s no public reporting it’s just a guess about who, what, where and how much money” is being deployed, which would also help “get at those impact measures,” adds Meixell.

The IRS, however, could use the data to develop its own analysis about the socioeconomic impact of an opportunity fund’s investments, but there’s no indication yet that it will.

John Lettieri, president of the Economic Innovation Group, which helped develop the concept of opportunity zones and OZ funds, told Bloomberg ‘s Daily Tax Report that the draft tax form  “will be unlikely to satisfy” those individuals and groups “looking for more a more comprehensive data regime.”

At best the tax form is a “first step towards meaningful accountability in the opportunity zones market,” but Treasury “should go further and ensure that accurate transaction-level data is available to the market,” said Fran Seegull, executive director of the U.S. Impact Investing Alliance. 

The alliance, along with several other nonprofit groups and the Federal Reserve Bank of New York, has recommended that opportunity zone reporting include nonfinancial metrics such as the number of jobs and affordable housing units created or improved outcomes in education or health.

Also to that end a bipartisan group of senators — Democrats Cory Booker of New Jersey and Maggie Hassan of New Hampshire and Republicans Tim Scott of South Carolina and Todd Young of Indiana — introduced a bill in May that would require more oversight of opportunity zone funds, disclosure of their impact on communities and support for new businesses.

Tax Savings and the Sophisticated Investor

For investors in opportunity funds, the impact is tax savings but only over time. Investors can reduce their tax bill in several ways: defer taxes on previously earned capital gains until the end of 2026 so long as the gains are invested in a fund within six months; reduce taxes on those previous gains if they stick with the fund for at least five years (the basis for those gains is discounted 10% after five years and 15% after seven); and pay no taxes on gains from their opportunity fund investment if they remain invested for at least 10 years.