What Biden Could Mean for Opportunity Zones

President Trump routinely triumphs the Opportunity Zone program as one of his signature accomplishments. But even if former Vice President Biden wins the presidency, Blake Christian, senior tax partner at HCVT LLP, doesn’t see Opportunity Zones going away.

“It came out of his [the Obama] administration, and I think that’s important,” states Christian. “Biden’s public statements are relatively supportive of continuing the Opportunity Zone program and his suggestions are pretty minor, like more transparency and making sure that they’re invigorating the poor neighborhoods and not just enriching business people.”

As a tax practitioner, Christian’s primary concern is Biden’s talk of increasing tax rates, specifically his plan to raise taxes for those making more than $400,000 a year. Opportunity Zone investors get a tax deferral until 2026.

“It is not a deferral of paying the tax,” Christian says. “It’s a deferral of reporting the gain. You’re going to pay tax at whatever the capital gain rate is in 2026, not what it is in the year you defer it. So that is the tax rate risk.”

However, Christian isn’t overly concerned about that prospect. His tax rate analysis shows that even if Biden bumps the rates to 39.6% plus the 3.8% Obamacare Tax, it is effectively less than a 2% cost per year for deferring the taxes for five to seven years. “It is arguably a very low-interest loan in return for gaining a significant long-term tax benefit,” Christian says.

In fact, Christian believes the tax treatment after a 10-year hold could be much more valuable in a high-rate environment. He contends that capital gains at 28% to 39.6% versus the current 20% plus 3.8% net investment income tax will also make the initial tax deferral more attractive.

Christian believes there is a chance that Biden expands the Opportunity Zone program into a massive 2021 stimulus program. He could also bring the program under one big umbrella with other initiatives instead of requiring the Opportunity Zone program to run in a silo and may incentivize Opportunity Zone funds to partner with nonprofit or community-oriented organizations.

Biden could build on current bills from Ron Wyden (D-Ore.) and James Clyburn (D-SC) that limit census tract qualification at 120% of national median family income. Christian suggests that this would exclude about 30 census tracts with higher median incomes that have been designated as Opportunity Zones under the exemption for contiguous tracts.

If re-elected, President Trump is more likely to double the number of Opportunity Zones by making up to 50% of census tracts eligible. Currently, 25% are eligible. “He envisions expanding the program,” Christian says.

Christian says Trump could also lock in the current capital gain rate payable on the deferred gain, which will be recognized on Dec. 31, 2026. That would remove the present tax rate risk for investors.

Looking forward, Christian believes Opportunity Zones could be the rarest of programs in Washington DC—something that produces bipartisan consensus.

“I think both parties really want to see infrastructure improvements,” Christian says. “What better way to increase employment? You can do a lot of public-private partnerships with infrastructure and use the Opportunity Zone as the platform.”