{"id":4818,"date":"2020-09-09T13:43:53","date_gmt":"2020-09-09T17:43:53","guid":{"rendered":"https:\/\/journals.law.harvard.edu\/hblr\/?p=4818"},"modified":"2025-02-27T21:56:23","modified_gmt":"2025-02-28T02:56:23","slug":"will-the-new-opportunity-zone-law-allow-investors-to-have-their-cake-and-eat-it-too","status":"publish","type":"post","link":"https:\/\/journals.law.harvard.edu\/hblr\/will-the-new-opportunity-zone-law-allow-investors-to-have-their-cake-and-eat-it-too\/","title":{"rendered":"Will the New Opportunity Zone Law Allow Investors to Have Their Cake and Eat It Too?"},"content":{"rendered":"

Although the corresponding final regulations are not yet available, the opportunity zone tax law passed in 2017 has generated significant buzz among investors, business owners, and community groups. The law, codified in Internal Revenue Code Sections 1400Z-1 and 1400Z-2, incentivizes new investment in businesses and real estate in designated low-income communities throughout the United States. The law is expected to unlock significant investment but is also controversial because of the lack of reporting requirements, the open questions surrounding the degree to which low-income people will benefit from the law, and the rich benefits it offers investors. Under the law, investors can receive tax deferral and tax elimination, including the complete elimination of capital gains from qualifying investments held for more than ten years.1<\/a><\/sup>See26 U.S.C. \u00a7 1400Z-2(c) (2017).<\/span> The law may also provide an added benefit to investors: a way to improve their tax position through the strategic use of debt. Unless regulators restrict the tax benefits available to investors who leverage their opportunity zone equity investments, those investments may produce significant benefits throughout the investment term, not only at disposition.<\/p>\n

In the landmark tax case,\u00a0Crane v. Commissioner<\/em> (1947),2<\/a><\/sup>Crane v. Comm\u2019r of Internal Revenue, 331 U.S. 1 (1947).<\/span> the Supreme Court held that the amount of a nonrecourse mortgage is included in the basis of a property, a determination significant for calculating a gain on sale or exchange but also for the purpose of determining the amount of depreciation deductions available to a taxpayer. Depreciation deductions allow taxpayers to reduce their income tax liability by deducting from income a portion of an asset\u2019s basis, according to an IRS-allowed depreciation schedule.3<\/a><\/sup>E.g., 26 U.S.C. \u00a7 168 (2015).<\/span> But these deductions are not \u201cfree\u201d; they are offset by reductions in the property\u2019s basis, increasing the tax liability to the taxpayer upon the disposition of the property. The Crane<\/em>\u00a0decision was significant\u2014indeed, opening the door to many forms of tax avoidance\u2014because it allowed taxpayers to obtain major tax benefits by financing investments with debt. By doing so, investors could enjoy depreciation deductions generated by property much more valuable than their own equity investments. Even if a future tax bill were higher because of the reduction in basis, the investors would benefit from years of tax deferral. But the petitioner in the\u00a0Crane<\/em> case, Beulah Crane, tried to take this benefit one step further. She used her apartment building\u2019s debt value when calculating depreciation deductions but omitted the debt value when calculating the amount realized when she sold the property.4<\/a><\/sup>Crane, 331 U.S. at 1. Although this was the fact pattern leading up to the case, Crane\u2019s legal arguments to the Court were different; in her brief, she did not defend her attempts to whipsaw the IRS. Brief for Petitioner, Crane v. Comm\u2019r of Internal Revenue, 331 U.S. 1 (1947) (No. 68).<\/span><\/p>\n

While Crane\u2019s attempt to whipsaw the IRS was inconsistent with the Court\u2019s holding\u2014she lost the case\u2014the opportunity zone law may allow investors to accomplish a similar result. Although IRC \u00a7 1400Z-2 stipulates that equity investments made in opportunity zone funds shall have a zero basis,5<\/a><\/sup>See26 U.S.C. \u00a7 1400Z-2(b)(2)(B)(i) (2017).<\/span> the Crane<\/em> decision suggests that an investor may enjoy a large basis in an opportunity zone investment through the use of debt, since the amount of a mortgage will be included in basis. This is significant because the depreciation deductions would probably not contribute to a higher tax bill in the future, as gains will be excluded as long as the investment is held for more than ten years.6<\/a><\/sup>See26 U.S.C. \u00a7 1400Z-2(c) (2017).<\/span> Although the investor\u2019s basis would be reduced each year according to the depreciation deductions taken, the opportunity zone benefit would allow a step up in basis to fair market value at disposition after ten years,7<\/a><\/sup>Id.<\/span> assuming the investor complied with all of the required opportunity zone rules. Assuming investors are able to benefit from leveraged investments in this way, the new law may bring more tax-driven, rather than fundamentals-driven, investment to the designated low-income communities. If this happens, the law\u2019s supposed alignment of interests between investors and communities\u2014through its focus on long-term, fundamentals-driven, equity investments, might be significantly eroded. Final regulations are expected in the coming months. Stay tuned.<\/p>\n","protected":false},"excerpt":{"rendered":"

Although the corresponding final regulations are not yet available, the opportunity zone tax law passed in 2017 has generated significant […]<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[22],"tags":[],"ppma_author":[383],"class_list":["post-4818","post","type-post","status-publish","format-standard","hentry","category-home"],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/pgKEUK-1fI","jetpack-related-posts":[{"id":4819,"url":"https:\/\/journals.law.harvard.edu\/hblr\/where-is-a-company-actually-located-for-the-purpose-of-receiving-favorable-tax-treatment\/","url_meta":{"origin":4818,"position":0},"title":"Where is a Company Actually Located for the Purpose of Receiving Favorable Tax Treatment?","author":"cmajocha","date":"September 9, 2020","format":false,"excerpt":"There are many factors a business might consider when deciding where to locate its offices, including proximity to certain pools of labor, suppliers, and customers, regulatory conditions, and the historic roots of the company. 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