What Are OZs?
OZs were created by the 2017 Tax Cuts and Jobs Act to generate long-term investments in rural and low-income urban communities across the nation. Based on nominations by each state’s governor, the IRS of the U.S. Department of Treasury designated as OZs up to 25 percent of each state’s low-income community census tracts and an additional 5 percent of adjacent moderate-income census tracts.
To date, the IRS has designated nearly 9,000 qualified OZs. View this reference in the GAO publication.
The OZ program is a tax incentive designed to attract investors that have experienced capital appreciation that otherwise would have to pay a capital gains tax upon sale of their assets. OZ investors can invest in a range of economic development activities in the OZ. To date, comprehensive data about real estate investments is in OZs is limited, though there is evidence of OZ investments in affordable rental housing.
Depending on the term of their investment, these individual and corporate investors can defer the payment of taxes and generate additional returns on those investments when they invest in economic development activities in the OZ. The prospect of increased returns is designed to attract a substantial amount of investment in communities that otherwise may not have attracted private capital. The returns to investors in OZ projects increase depending on the time of their investment, with increasing benefits generated after 5-, 7-, and 10-year time periods. If an investor invests funds for at least 10 years, any additional capital gain that is generated after the initial 10-year period can be excluded from their tax obligation.
OZ investments are market-driven; the investor and project developer negotiate the amount of investment and the financial returns. Industry observers suggest that trillions of dollars of unrealized capital gains may prove to be valuable sources of capital that potentially could be invested in affordable housing in OZs.