When Should a Real Estate Developer Consider an Opportunity Zone Investment?
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An opportunity zone is a designated low-income census tract where qualifying investment may receive preferential tax treatment.
Congress created the program through the Tax Cuts and Jobs Act of 2017 to direct meaningful private capital toward communities needing new investment. Investors participate through a fund holding at least 90% of its assets in eligible zone property.
The investment could postpone taxation of the original gain until an inclusion event or December 31, 2026, whichever came first. A qualifying investment held for at least 10 years could also exclude appreciation generated by the fund investment. That combination made real estate a natural fit because development projects often require capital and long holding periods.
What changed under the new law?
The One Big Beautiful Bill Act, enacted July 4, 2025, converted the program from a temporary initiative into a continuing investment framework.
- Permanent, rotating designations. The first new designations take effect January 1, 2027, and run through December 31, 2036. New designation periods will follow every 10 years.
- Five-year deferral periods. For eligible gains invested after December 31, 2026, tax is deferred until the investment is sold or exchanged or until five years after investment, whichever occurs first.
- Five-year basis increases. Investors holding a regular fund investment for five years receive a 10% basis increase. Investments in qualified rural opportunity funds (QROF) receive a 30% increase compared to a 10% basis step-up for regular qualified opportunity funds (QOFs).
- Continued appreciation exclusion. Investors who satisfy the 10-year holding requirement may elect to exclude post-investment appreciation. For investments held beyond 30 years, the basis adjustment is capped using fair market value on the 30-year anniversary.
- Stronger rural incentives. Certain rural projects have a 50% substantial-improvement threshold rather than the standard 100% threshold, potentially making rehabilitation projects more feasible.
- Expanded reporting. Funds must report information, including industry classifications, asset values, investment activity, and employment data. Incomplete filings may produce daily penalties, with higher maximums for funds exceeding $10 million in gross assets.
When does the strategy make sense for a developer?
A developer should consider the structure when several business and tax conditions align:
- An investor has an eligible gain. The project has access to investors who can contribute qualifying gains within the 180-day window and want qualified opportunity zone capital gain deferral.
- The property is viable. Location, demand, construction costs, financing, rents, absorption, and exit assumptions should support the project without relying on qualified opportunity zone tax benefits to rescue weak economics.
- The development plan satisfies operational rules. The property must qualify as eligible zone property, and the project must meet original-use or substantial-improvement requirements, along with fund and business tests.
- The capital can remain invested. The strongest potential benefit requires a 10-year hold. Investors needing near-term liquidity may find the structure poorly matched to their goals.
- The tax-payment plan is clear. Existing investments may trigger recognition of remaining deferred gain in 2026 even though the investment remains illiquid. Developers and fund sponsors should help investors anticipate that obligation.
- Rural economics improve materially. Beginning with the new regime, a rural project may benefit from the larger basis increase and lower rehabilitation threshold, making a rural QOZ fund worth evaluating.
- Compliance infrastructure exists. Fund formation, valuation, testing, reporting, and investor communication require disciplined administration.
The answer is: use the program when a development opportunity, patient capital, eligible gains, and compliance all meet together. Tax treatment can improve a strong deal. It rarely repairs a bad one.
How BT Can Help
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Rick Suid, Partner in Bennett Thrasher’s Financial Reporting & Assurance practice with extensive Real Estate industry experience, or call us at 770.396.2200.
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