Debate: Should Tax Deferrals From Opportunity Zone Investments Be Extended?

Two professors discuss delaying the taxation of these capital gains through 2028.

The 2017 tax reform legislation created new rules governing the taxation of capital gains stemming from investments in qualified opportunity zones.

The qualified opportunity zones program is intended to encourage investment in designated low-income areas. Taxpayers are eligible to defer gain recognition and, instead, the gain is included in income in the year that includes the earlier of (1) the date the investment is sold or exchanged or (2) Dec. 31, 2026. 

Recent proposals would extend the opportunity zone rules and expand the availability of the deferral program so that gain deferral would be extended through Dec. 31, 2028. Further, the existing holding period requirement would be reduced from seven years to six years.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about proposals to extend the opportunity zone incentives.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: Many of the tax incentives associated with the opportunity zone program have already begun to phase out — and the full tax deferral benefit is unavailable to new investors at the precise time when people may have renewed interest.

This bill would extend the tax deferral potential through 2028 and reduce the holding period requirement so that more taxpayers become eligible to participate in this valuable program. These extensions make perfect sense given the time it’s taken to develop the rules in the first place.

Bloink: This new legislation would add significant complexities to an already complicated tax deferral regime. Notably, opportunity zone tracts would be required to use the more recently available 2020 census data — where many initially relied on older census data to qualify in the first place. That would create an administrative nightmare as many OZs would be targeted for early sunsetting — a problem that could be especially damaging for smaller opportunity zone funds. 

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Byrnes: The phase-out of the availability of valuable opportunity zone benefits began to happen before the program could really and fully get off the ground. It took time to develop the rules surrounding the opportunity zone program — and those rules are anything but simple, meaning that investors deserve time to evaluate those rules.

Given that, plus the significant COVID-19-related interruptions that came right in the middle of the new program, it only makes sense that we should act to extend the program and make it available to additional investors. 

Bloink: Yes, it’s important to make sure funds are targeted to communities that actually need the funds, but the new rules would cause more harm than good when it comes to preserving this valuable program. We should be more focused on simplifying the rules so that the funds get where they need to go — rather than making sure wealthy investors have more opportunities to minimize tax liability.

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Byrnes: The opportunity zone program works only if we have investors willing to place their hard-earned money into these investments. The program is designed to encourage these types of investments in exchange for tax incentives. If the program is allowed to sunset before it ever gets off the ground, what’s the point in the first place/?

Bloink: When we have complex programs like this with detailed rules that are difficult to understand, it becomes even more likely that the only people who will benefit are the wealthiest Americans. The problem with the opportunity zone program isn’t that the tax benefits aren’t sufficient. The problem is that the funds are often mismanaged and fail to benefit those low-income communities that need help the most.

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