Opportunity zone

Opportunity zones are census tracts, nominated by governors and certified by the federal government, in which a tax incentive applies to new investment. An investor who sells an asset and reinvests the capital gain in a qualified opportunity fund within a set window can defer tax on that gain and, if the new investment is held long enough, exclude the appreciation on the new investment from tax entirely. The fund must invest in property or businesses located in the zone, and property must be substantially improved or newly built.

For a housing developer, the program does not change what a building costs to build. It changes the return an equity investor earns after tax, which lowers the pre-tax return the investor requires. That, in turn, lowers the net operating income and rent a project needs to attract capital. In effect, part of the return is paid by the federal treasury through forgone tax rather than by tenants through rent.

The debate over opportunity zones concerns targeting. Because the benefit is tied to appreciation, it is most valuable for projects that would have appreciated anyway, and there is no requirement that the housing built be affordable or that the investment serve the tract's existing residents. Whether the program produces housing that would not otherwise have been built, and in the places that most need it, is an open empirical question we do not attempt to settle here. It sits alongside tax credits and historic credits as a federal tool that works through the investor's tax bill rather than through a direct subsidy.