Opportunity Zones: 2022 Year in Review
As 2022 draws to a close, we take time to reflect on the state of the Opportunity Zone incentive and consider what may lie ahead during the upcoming year. It has been an eventful year for OZ investors, operators and fund managers, and many OZ stakeholders will be seeking stability in 2023.
Significant Occurrences in 2022:
- In January, and again in April, Congressional inquiries led by Senate Finance Committee Chairman Ron Wyden (D-Oregon) were made to several specifically identified Qualified Opportunity Funds to investigate potential or perceived abuses of the OZ program.
- In February, Treasury Inspector General for Tax Administration (TIGTA) released a report recommending key changes the IRS should undertake to improve the processes surrounding compliance with the OZ program.
- In April, the Opportunity Zones Transparency, Extension, and Improvement Act was introduced, which provided several welcomed changes to the OZ program.
- In October, the IRS Associate Chief Counsel’s Office issued a statement indicating the Service’s plans for increased examination activity among Opportunity Zone taxpayers.
Meanwhile, 2022 saw rapid inflation and price fluctuations on commodities and other material costs, followed by significant increases in interest rates. These two microeconomic factors, along with general uncertainty about the future of the broader economy, caused many OZ projects to delay, restructure, and in some cases, dissolve altogether. OZ stakeholders have been forced to remain patient during this unpredictable year.
What’s Next for Opportunity Zones?
Despite the many challenges faced by OZ stakeholders in 2022, investment in Opportunity Zones remained strong throughout the year. Positive economic indicators in early 2022 provided opportunities for realizing capital gains from asset, portfolio, and business sales, giving taxpayers the chance to consider investing in OZ’s. Even though transaction volume may have slowed later in the year, taxpayers should consider whether they will receive passthrough Schedule K-1s reporting a capital gain for tax year 2022. Passthrough K-1 gains can be invested in Opportunity Zones as late as September 2023, so investment and tax planning opportunities may still exist after the end of the year.
Although the Opportunity Zones Transparency, Extension, and Improvement Act was not signed into law during 2022 (and is not expected to be part of a year-end tax extenders package), the bill remains bipartisan, with more Congressional leaders signing on to support it during the year. With the arrival of a new year and a new Congress, new life may be breathed into this bill in early 2023. The bill, if passed in its current form, would add several key provisions, including an extension of the original gain deferral period for another two years (to December 31, 2028), reinstating the 5% and 10% basis adjustment benefits, and allowing a newly defined a “fund of funds” investment structure.
Designed for longer-term strategies based on a ten-year (or longer) holding period, OZ investments were naturally going to experience some forms of economic pressure during their life cycle, and talented fund managers will continue to seek solutions to ensure the long-term success of their OZ projects. Similarly, professional advisors should continue to monitor the political landscape and remain current on new developments in the OZ incentive. Taxpayers should remember that Opportunity Zone investments remain a fundamentally valuable tax planning strategy and should be considered as part of a comprehensive financial plan.
At CLA, our OZ Working Group looks forward to continued commitment to the Opportunity Zones incentive in the new year and are excited to provide more valuable content to our readers. Have a safe and enjoyable New Year!
Brian is a Signing Director in CLA's Real Estate industry group and has more than 15 years of experience working with real estate operators, land developers, commercial real estate companies, private equity funds, and general contractors. Brian is also part of CLA's Opportunity Zone working group, and leads a team providing compliance, consulting, and advisory services to opportunity zone investors, qualified opportunity funds, and qualified opportunity zone businesses.
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