Would Opportunity Zones Still be a Worthwhile Investment Under the American Families Plan?

• May 7, 2021
• Carey M. Heyman, CPA

As discussed in last week’s blog post, President Biden’s American Families Plan proposes to increase the capital gains rate to the top tax rate for individuals for those making more than $1 million. While the proposed rate hike will have an obvious impact on the taxation of appreciated investments, Qualified Opportunity Zones (QOZs) should still be considered a worthwhile avenue for real estate investing.

By making a QOZ investment in a rising tax rate environment, a taxpayer would be eligible for the following:

1. Short-term temporary deferral of capital gains invested into QOZs at current, lower tax rates.
2. Permanent partial exclusion of up to 10% of the original capital gain deferred, assuming that the QOZ investment is held for five years before December 31, 2026. Any remaining original gain will be recognized on December 31, 2026 and would be subject to the proposed, higher tax rates.
3. Permanent exclusion of all future capital appreciation of the QOZ investment, assuming that the QOZ investment is held for at least 10 years. This excluded amount would have otherwise been taxed at the proposed, higher tax rates.

Consider an investment of $1 million into two, similar real estate investments, both of which earn a 10% annualized pre-tax internal rate of return, but where one investment is non-QOZ (left columns) and the other is a QOZ (right columns). As you can see below, the QOZ investment would yield higher after-tax returns than a non-QOZ investment of equivalent performance.

Big thanks to colleagues Brian Duren, Chase Nystedt and Lucas Whelan for their work on this blog post!

Tags: Opportunity Zones, Real Estate, Federal and state taxation, including proposed regulations, Industry best practices, Industry trends/analysis | Comments Off on Would Opportunity Zones Still be a Worthwhile Investment Under the American Families Plan?