Opportunity Zones 2.0
Subscribe 0Discussion led by Brett Mulberg, City National Bank
Brett led a discussion on Opportunity Zones, including lessons learned from the original program, tax and investment considerations, and changes under Opportunity Zones 2.0.
Key Takeaways
- 2017: Original Opportunity Zone program established.
- ~$100 billion: Approximate capital generated through the program by 2024, as cited during the presentation.
- Top 1% / 35%: The top 1% of U.S. households was cited as holding approximately 35% of the nation’s wealth, illustrating the concentration of appreciated assets among potential Opportunity Zone investors.
- $3.8 trillion: Approximate unrealized capital gains held by U.S. households cited during the discussion.
- $2.2 trillion: Additional unrealized capital gains attributed to domestic corporations.
- 23.8%+: Federal capital gains tax exposure referenced during the discussion, with potentially higher combined rates in states such as California.
- 8,764 QOZs: Current number of designated Opportunity Zones nationwide. 3,309 of the current zones are classified as entirely rural.
- ~20 QOZ/QOZB entities: One member shared experience forming approximately 20 entities during OZ 1.0, estimating that roughly one-third performed very well, one-third struggled and one-third were ultimately abandoned.
Important Dates & Holding Periods
- 180 days: General window for reinvesting an eligible capital gain into a Qualified Opportunity Fund, with additional timing flexibility possible for certain pass-through entity gains.
- December 31, 2026: Deferred gains from OZ 1.0 generally must be recognized by this date if an earlier inclusion event has not occurred.
- January 1, 2027: New Opportunity Zone designations and the permanent OZ framework take effect. New rounds of QOZ designations will follow every 10 years.
- 5-year deferral: For qualifying investments made beginning in 2027, eligible gains may generally be deferred until the earlier of an inclusion event or five years after the investment.
- 10% basis step-up: Qualifying OZ 2.0 investments held for at least five years receive a 10% basis increase.
- 30% rural basis step-up: Qualifying Rural Opportunity Fund investments held for at least five years receive an enhanced 30% basis increase.
- 10-year hold: Qualifying appreciation may be excluded from federal capital gains taxation through a fair market value basis adjustment after the required holding period.
Investment & Planning Considerations
- Eligible capital gains may come from a broad range of appreciated assets, including real estate, stocks, bonds, mutual funds, cryptocurrency, collectibles and art.
- Unlike a 1031 exchange, an Opportunity Zone investment generally requires reinvestment of the capital gain rather than the entire sale proceeds.
- Members discussed using an Opportunity Zone investment for taxable “boot” from a partial 1031 exchange as another potential planning strategy.
- Early OZ 1.0 participants tended to include large real estate developers, family offices and high-net-worth investors with sufficient liquidity for a long-term investment.
- Members cautioned about aggressive valuations and promoter-driven strategies, particularly for OZ 1.0 investments approaching the end of 2026.
- The strongest OZ investments were described as fundamentally sound investments first, with the tax advantages serving as an additional benefit.
- Cash flow, liquidity, financing and exit strategy remain critical, particularly for investors seeking the benefits associated with a 10-year hold.
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