The Opportunity Zone program, established under the Tax Cuts and Jobs Act of 2017, has successfully spurred investment in designated areas, driving economic growth and development in underserved communities. However, key aspects of the program are still up for discussion, and we’re tracking several legislative priorities:
- Extensions of Key Potential Tax Benefits
While the OZ program currently allows for significant tax advantages—including deferrals and tax free growth on any fund profits—many investors are watching for potential extensions to existing deadlines. Legislative proposals, such as the Opportunity Zones Transparency, Extension, and Improvement Act, have suggested extending deferral benefits beyond the current December 31, 2026, deadline. - Additional Reporting and Transparency Requirements
Policymakers have been pushing for more transparency around OZ investments, ensuring that funds are being used effectively to generate meaningful community impact. We anticipate continued discussions around reporting requirements and community impact assessments. - Enhancements to Potential Investor Benefits:
Some legislative proposals aim to reintroduce potential benefits like the 10% step-up in basis for investments held for at least five years, which was phased out at the end of 2021. If reinstated, this could add another layer of incentive for investors.
What We’d Like to See in Future OZ Legislation
Urban Catalyst strongly supports efforts to improve and extend the Opportunity Zone program. We agree with the legislative priorities above and believe that updates to the legislation should also focus on:
- Allowing Qualified Opportunity Fund (QOF) Investments in Other QOFs:
Under current regulations, a Qualified Opportunity Fund cannot invest in another QOF. This legislation would remove that restriction, enabling the creation of “fund of funds” structures. By allowing capital to flow more efficiently between funds, this change would help smaller communities and projects attract investment and raise equity more effectively. - Redefine OZ Census Tracts to Include More Underserved Areas:
Some existing OZ tracts may no longer qualify, yet many communities still require economic support. The Small Business Jobs Act (H.R. 3937), which includes the Rural Opportunity Zone and Investment Act (H.R. 3906), proposes designating 1,926 rural census tracts as OZs. Currently, rural areas receive less than 8% of OZ investments—this legislation would significantly expand opportunities for these communities.
Why Investing Now Makes Sense—Even Before Legislation Passes
While we remain hopeful for improvements to the OZ program, waiting for legislation to pass before investing could mean missing prime opportunities. Here’s why acting now is the smarter strategy:
- Capital Gains Deferral Until 2027
One of the potential benefits of investing in an Opportunity Zone Fund is the ability to defer paying capital gains taxes until 2027. This can provide significant flexibility for investors. However, an important consideration is whether you’ll be in a different tax bracket when you have to pay taxes. Be sure to consult with your CPA to assess your specific situation and make an informed decision. Tax planning plays a crucial role in maximizing your return on investment.
- The Possibility of Program Extension
With the Trump administration back in office, there’s a solid chance that the Opportunity Zone program could be extended beyond 2026. Created as part of the 2017 Tax Cuts and Jobs Act, this program has incentivized investment in economically distressed areas. Scott Turner, who served as the Director of the White House Opportunity & Revitalization Council during Trump’s first term, has been nominated as the Secretary of Housing and Urban Development. This is a promising sign that additional legislative support for the Opportunity Zone program may be on the horizon, ensuring its continued relevance for investors. - 10-Year Tax Benefit Possibilities
One potential aspect of Opportunity Zone Funds is the opportunity for federally tax‐free growth on any profits over a 10‐year period. For example, consider a hypothetical investment of $300,000 in a Qualified Opportunity Fund (QOF). Over the life of the holding period, the investment might increase in value. Under these assumptions—and using the current long‐term capital gains tax rate of 20%—there could be a federal capital gains tax saving of $60,000. Of course, this example is provided solely for illustrative purposes and is not intended as a prediction of actual results.
Final Thoughts
As 2025 begins, Urban Catalyst remains committed to leveraging the Opportunity Zone program to drive impactful, high-quality development. While we advocate for legislative improvements, we also recognize the value of acting now. The combination of current potential tax benefits, strong market conditions, and available high-quality projects makes this an ideal time for investors to take advantage of OZ opportunities.
If you’re considering an OZ investment, don’t wait on legislation—explore your options now by contacting us today.
Important Disclosures
The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the confidential Private Placement Memorandum (the “PPM”) which is available upon request, (iii) do not and cannot replace the PPM and is qualified in its entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by an issuer, or any affiliate, or partner thereof ("Issuer").
All potential investors must read the PPM and no person may invest without acknowledging receipt and complete review of the PPM.
With respect to any performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. All investments carry the risk of loss of some or all of the principal invested. Assumptions are more fully outlined in the Offering Documents/ PPM for the respective offering. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment.
These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. All offerings are intended only for accredited investors unless otherwise specified.
Past performance are no guarantee of future results. All information is subject to change. You should always consult a tax professional prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum issued by Issuer, or one of its partner/issuers. Issuer does not warrant the accuracy or completeness of the information contained herein. Thank you for your cooperation.
Real Estate Risk Disclosure:
- There is no guarantee that any strategy will be successful or achieve investment objectives including, among other things, profits, distributions, tax benefits, exit strategy, etc.;
- Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
- Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- Potential for foreclosure – All financed real estate investments have potential for foreclosure;
- Illiquidity – These assets are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
- Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
- Stated tax benefits – Any stated tax benefits are not guaranteed and are subject to changes in the tax code. Speak to your tax professional prior to investing.
Opportunity Zone Disclosures
- Investing in opportunity zones is speculative. Opportunity zones are newly formed entities with no operating history. There is no assurance of investment return, property appreciation, or profits. The ability to resell the fund’s underlying investment properties or businesses is not guaranteed. Investing in opportunity zone funds may involve a higher level of risk than investing in other established real estate offerings.
- Long-term investment. Opportunity zone funds have illiquid underlying investments that may not be easy to sell and the return of capital and realization of gains, if any, from an investment will generally occur only upon the partial or complete disposition or refinancing of such investments.
- Limited secondary market for redemption. Although secondary markets may provide a liquidity option in limited circumstances, the amount you will receive typically is discounted to current valuations.
- Difficult valuation assessment. The portfolio holdings in opportunity zone funds may be difficult to value because financial markets or exchanges do not usually quote or trade the holdings. As such, market prices for most of a fund’s holdings will not be readily available.
- Capital call default consequences. Meeting capital calls to provide managers with the pledged capital is a contractual obligation of each investor. Failure to meet this requirement in a timely manner could elicit significant adverse consequences, including, without limitation, the forfeiture of your interest in the fund.
- Opportunity zone funds may use leverage in connection with certain investments or participate in investments with highly leveraged capital structures. Leverage involves a high degree of financial risk and may increase the exposure of such investments to factors such as rising interest rates, downturns in the economy or deterioration in the condition of the assets underlying such investments.
- Unregistered investment. As with other unregistered investments, the regulatory protections of the Investment Company Act of 1940 are not available with unregistered securities.
- It is possible, due to tax, regulatory, or investment decisions, that a fund, or its investors, are unable realize any tax benefits. You should evaluate the merits of the underlying investment and not solely invest in an opportunity zone fund for any potential tax advantage.
The above material cannot be altered, revised, and/or modified without the express written consent of Urban Catalyst.
