Timing is key as new opportunity zones take effect in January and the selection process is happening now as governors nominate zones to the U.S. Treasury Department.
By Aaron Kirk Douglas
Opportunity zones are now a permanent part of the tax code, and the change gives multifamily investors a longer runway and a reason to plan, according to Melissa Wall, a CPA with Aprio.
Wall framed the benefits in three parts she calls D, R and E: deferral, reduction and exclusion. Under the first version of the program, the deferral ran to the end of 2026. Under the new version, which she called OZ 2.0, the deferral begins Jan. 1, 2027, and rolls forward five years at a time because the program is now permanent. “This is something that we can be planning all the time with,” she said.
The reduction improved for certain deals. When deferred gain becomes taxable, investors get a 10% reduction in a standard opportunity zone. In a new rural opportunity zone, the reduction is 30%. Rural zones also carry an easier improvement test. Standard zones require doubling a building’s basis, while rural zones require only a 50% increase. Rural zones are defined as communities under 50,000 people that are not next to larger metro areas.
The exclusion is unchanged. After a 10-year hold, gains earned during the investment period can be excluded, and the total hold can run up to 30 years. For real estate owners, Wall said, the appeal is that there is no depreciation recapture on a sale within that window, provided all requirements are met.
Timing is the near-term story. New zones take effect Jan. 1, 2027, and the selection process is happening now. Governors nominate zones to the U.S. Treasury Department, with Oregon and Washington nominations due in July. Treasury is expected to certify zones by September or October. Wall said that gives investors and developers a short window to influence which areas get picked. “If developers and investors have favorite areas, they really need to be talking with their governors,” she said, noting both states have published guidance for nominating zones.
There is also an overlap. First-generation zones remain effective through the end of 2028, which Wall said is the only time in the program’s history that old and new zones will run side by side. Existing zones can be renominated for the new round, but they must be renominated to qualify.
Wall said the permanence is drawing owners who want out of active management. She described talking with fund managers in New York, including one running $2 billion in opportunity zone capital with an average investment of nearly $300,000. With a wave of wealth transfer coming, she said, some owners whose heirs do not want to manage property are looking at funds as a hands-off option that still captures the deferral.
She offered two cautions. First, deals must stand on their own. “The deals have to pencil without the OZ benefits,” she said. “The OZ benefit is icing on top of the cake.” Second, the paperwork has to be right from the start. Some investors put money into funds without a qualifying gain or missed the deferral election, and Wall said those mistakes often cannot be fixed.
She also flagged a records issue that few discuss. Most businesses purge documents after seven years, but an opportunity zone investment can run 10 to 30 years. “Who’s going to have the documents to prove that you had an effective deferral?” she asked. She now files that documentation away for the full hold.
Bottom Line: Permanence turns opportunity zones from a closing window into an ongoing planning tool, which matters for owners sitting on large gains or eyeing an exit from active management. The immediate action item is the zone selection process, since owners with a preferred site have only until July to weigh in. As always, the underlying deal must pencil on its own before the tax benefit is worth chasing.
About the author:
HFO Research (Aaron Kirk Douglas) from HFO Investment Real Estate’s Multifamily Marketwatch YouTube podcast, hosted by partner Greg Frick. Aaron Kirk Douglas is director of market intelligence for HFO Investment Real Estate In Portland.
Image courtesy of DepositPhotos.com
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