Census Counts Won’t Expand Opportunity Zones and Tax Breaks

A communication from the IRS is rarely a comforting thing. And investors who hoped during the Trump administration that the Opportunity Zone program might expand because of the pandemic just got a disappointing form letter. 

Those hoping that new Census counts would lead to expanded Opportunity Zones and their impact on capital gains planning have learned that the original boundaries won’t move.

In an announcement, the IRS wrote, “In response to questions from the public on the effect, if any, of the 2020 decennial census, recently released by the U.S. Census Bureau, on boundaries of qualified opportunity zones (each, a QOZ) listed in Notice 2018-48, 2018-28 I.R.B. 9, or Notice 2019-42, 2019-29 I.R.B. 352 (each, a Designated QOZ), this announcement confirms that the boundaries of the Designated QOZs were established at the time they were designated and are not subject to change.”

The letter went on to note that the 2017 Tax Cuts and Jobs Act—the major tax law overhaul that established the Opportunity Zone program—established a fixed process and limited timeframe to designate Qualified Opportunity Zones. Designated census tract numbers were based on the 2010 census. No provision was made to adjust them.

“Accordingly, boundaries of a Designated QOZ do not shrink or expand if the 2020 decennial census results in a change to the boundaries of a census tract,” the agency wrote.

Given news of the Biden administration’s interest in doubling capital gains for individuals making more than $1 a year, ending 1031 exchanges, and possibly ending basis step-up on death, OZ investment has offered a potential way to address at least some of the impact.

However, there may be additional opportunities within the current program. An investment made now, while not having the full seven years for the 15% basis step-up, could still qualify for the 10% step-up after five years at the 2026 deadline.

Also, investment in operating businesses has lagged according to experts.

“Opportunity Zones were not designed to be a real estate play,” Steve Sharkey, a partner based in Baltimore for DLA Piper, told GlobeSt.com in June 2020. “The guys who put this stuff together actually were thinking about operating businesses. And it really has not grabbed hold in that area. It has kind of underperformed relative to being fuel for investment into startup businesses as opposed to real estate projects.”