A tax-friendly investment tool created with the stated goal of serving economically distressed U.S. communities is now under scrutiny by Congress.

Qualified Opportunity Zones (QOZs) were started by 2017 tax reform with the twin goals of spurring investment in under-served communities and providing a tax break to investors.

A QOZ is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment, according to the IRS. Localities qualify as QOZs if they’ve been nominated for that designation by a state, the District of Columbia or a U.S. territory and that nomination has been certified by the U.S. Treasury.

But while the tax benefits of QOZs are clear, the same cannot be said for the benefits they derive for the communities they are focused on. In a letter to an QOZ investor in January, Sen. Ron Wyden (D-Ore.) expressed doubts and has launched an investigation into the program.

“Among the investments that have reportedly qualified for these generous tax breaks are projects that include luxury apartment buildings and hotels, high-end office towers, self-storage facilities and a ‘superyacht marina,’” Wyden wrote, adding that a report by the Government Accountability Office (GAO) noted that “representatives of several Opportunity funds indicated that they would have proceeded with projects in what are now designated zones without the tax incentives provided by the Opportunity Zone program.”

“The stated intent of the QOZ program was to encourage investment in economically distressed areas through a series of tax benefits. The statute did not specify the type of investment other than it excluded certain ‘sin’ businesses from the benefits of the program,” said Kenneth Weissenberg, partner and co-chair of the Real Estate Services/Member-National Tax Group at Eisner Advisory Group in New York. “The statute did not require reporting of the number of housing units created nor require an income limitation on the eligibility to rent units created. Neither did it specify the number of jobs to be created nor the employment to be generated for residents of the zone.”

“From what we’ve seen, QOZs have brought capital to communities that might not have otherwise seen those dollars,” said Andrew Gordon, a CPA and attorney with the Gordon Law Group in Northfield, Ill. “It’s not just a benefit for the billionaires or wealthy elite. We have seen smaller investors, especially those with gains from cryptocurrency, can reinvest these gains into OZs in a tax-friendly way.”

Wyden has introduced legislation to reform the program, including requiring annual public information reporting and annual statements to the IRS from fund investors. The legislation would also prohibit investments in casinos, luxury apartments and stadiums, as well as tighten existing rules to ensure that these incentives support new investments and do not provide tax-free gains for investments in projects that were already underway.

“I tell my clients that QOZ investments are one of the few remaining tax structures which can provide a current deferral of tax and an exclusion for gains on investments sold after 10 years,” Weissenberg said. “The most significant risk is an increase in the tax rates for the deferred gains when they’re recognized in 2026.

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