The Opportunity Zone (OZ) Program was created as part of the Investing in Opportunity Act, which was included in the Tax Cuts and Jobs Act enacted in December 2017. The OZ program was created to encourage private investment in these communities in exchange for capital gain tax incentives. The goal is to use the estimated $6.1 trillion of unrealized private gains held by U.S. households. In exchange for investing in communities in qualified OZs, investors will receive beneficial capital gains tax treatment both immediately and over the long term.

Both federal and state housing agencies are beginning to take steps to make the OZ program more workable with the LIHTC program. With regard to Federal Housing Administration (FHA) mortgage insurance for properties located in OZs, the FHA will reduce application fees for certain affordable housing programs. HUD is also designating a special team of underwriters to speed up processing of those applications. Fees for properties with at least 90% of units eligible for Section 8 or LIHTC residents will be reduced by two-thirds. It is estimated that this will encourage $100 million of investment in OZs.

There is also an LIHTC pilot program that will expedite FHA mortgage financing for projects with equity from the LIHTC program. This pilot program will be available to new construction or substantial rehabilitation LIHTC properties.

Unlike current programs intended to stimulate private investment in low-income areas, Opportunity Funds (the funds invested in OZs) can self-certify without the need for approval from the Department of Treasury. This means that Opportunity Funds are managed entirely in the private market with the administration of the funds being entirely the responsibility of fund managers rather than government agencies or individual investors. There is no cap on the amount of capital that can be invested in qualified OZs through the program.

Creating & Investing in OZs

OZs are created through a nomination and designation process. Governors of U.S. states and territories – as well as the Mayor of Washington, DC – nominate census tracts as OZs. To qualify, a census tract must meet the following requirements, as stipulated in §45(D)(e):

  • A poverty rate of at least 20%; or
  • A median family income of no more than 80% of the statewide median family income for census tracts within non-metropolitan areas or no more than 80% of the greater statewide median family income or the overall metropolitan median family income for census tracts within metropolitan areas.

57% of all neighborhoods in the United States were considered. The Treasury Department officially certified more than 8,700 census tracts as OZs in June 2018, which is about 12% of all the census tracts in the country.

In exchange for investing in OZs, investors can access capital gains tax incentives available only through the OZ program. Investors may only invest in OZs through Opportunity Funds. A qualified Opportunity Fund is a U.S. partnership or corporation that intends to invest at least 90% of its holdings in one or more qualified OZs.

There are restrictions on the types of investments in which an Opportunity Fund can invest. These are called “Qualified Opportunity Zone Properties,” and may be defined as any one of the following:

  1. Partnership interests in businesses that operate in a qualified OZ;
  2. Stock ownership in businesses that conduct most of their business in an OZ; or
  3. Property such as real estate located within a qualified OZ.

The types of real estate investments permitted by the program are limited to ensure that the communities are improved with the investment. Opportunity funds may invest only in the construction of new buildings or the substantial improvement of existing unused buildings. If an Opportunity Fund invests in the improvement of an existing building, it must invest more in the improvement of the building than it paid to buy the building. Whether the building is constructed from the ground up or improved, the development of the building must be completed within 30 months of purchase.

Tax Benefits

When an investor sells an appreciated asset, there is a capital gain, which is a taxable event. Under the OZ program, if an investor reinvests a capital gain into an Opportunity Fund, tax liability on the gain is deferred. The investor may also receive tax free treatment for all future appreciation earned through the fund. Primary tax benefits from investing in an Opportunity Fund include:

  1. Payment of capital gains tax is deferred until April 2027 for investments that are held through December 31, 2026. To receive this benefit, the gains must be invested in a qualified Opportunity Fund within 180 days of the sale of the asset.
  2. If the Opportunity Fund investment is held for at least five years prior to December 31, 2026, liability on the deferred capital gain is reduced by 10%. If the investment is held for a minimum of seven years prior to December 31, 2026, tax liability is reduced by 15%.
  3. If an Opportunity Fund investment is held for ten years or longer, there will be no capital gains tax on any appreciation on the Opportunity Fund investment. I.e., Opportunity Fund gains from investments in OZs qualify for permanent exclusion from capital gains tax if the investment is held for at least ten years.

OZs and Multifamily Housing

At this point, it appears that market rate rental housing will be one of the most popular outlets for OZs. Of the approximately 105 funds currently in existence, 70 (representing about $15 billion in assets or 75% of total funding) have an investment focus on multifamily residential development. Of all funds that have a multifamily component, 28 also have a focus on affordable housing.

Currently, financial institutions are the primary LIHTC investors, but Opportunity Fund investors tend to be high net worth individuals, managed investment funds, life insurance companies, and mutual funds. Banks generally do not have capital gains to reinvest.

Many states are actively working to make OZ investments and the LIHTC program work together. For example, the Michigan State Housing Development Authority plans to incentivize OZs in the allocation of tax credits. Legislation was recently passed in Nebraska giving priority to OZs in receiving funds from the state Affordable Housing Trust Fund.


The Opportunity Zone program is generating a lot of excitement in the investment community. It will almost certainly increase investment in areas of need. Whether the Low-Income Housing Tax Credit Program will play a substantial role in the OZ program is still an open question, but there is clearly a place for the LIHTC program in Opportunity Zones.