Impact Growth Capital Newsletter

 This week at IGC: The Tax Edition
Are Opportunity Zones Still Worth Pursuing and Tariffs Boost Real Estate Interest

Real Time Market Snapshot

Data as of 3/12/2025

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Tax Season

Opportunity Zones in 2025: Are the Tax Advantages Still Worth Pursuing?

The Opportunity Zone (OZ) program was introduced in the 2017 Tax Cuts and Jobs Act (TCJA) with the promise of revitalizing economically distressed areas while offering lucrative tax incentives to investors. As we move through 2025, with portions of the program nearing their deadlines, many are asking: Does investing in OZs still make sense?

For those looking to defer capital gains, reduce tax liabilities, and potentially eliminate capital gains tax altogether, Opportunity Zones remain a viable—though increasingly selective—investment strategy. Here’s what you need to know about the current state of the program, upcoming deadlines, and whether it still holds value for investors.

The OZ program was designed to drive long-term private capital into designated low-income communities by offering three key tax benefits:

1. Capital Gains Deferral: Investors can defer paying capital gains tax on gains rolled into a Qualified Opportunity Fund (QOF) until December 31, 2026 (or when the investment is sold, if earlier).

2. Step-Up in Basis (Now Expired): Previously, investors could reduce their deferred gains by 10-15% if they held the QOF investment for five or seven years before 2026. However, since these deadlines have passed, this benefit is no longer available.

3. Tax-Free Appreciation: The most powerful incentive—any gains earned from the OZ investment itself (beyond the deferred capital gain) are 100% tax-free if the investment is held for at least 10 years. These proposed tax reforms underscore the administration's commitment to fostering a business environment conducive to growth and competitiveness. By enhancing capital cost recovery and supporting R&D initiatives, the policies are anticipated to stimulate economic activity, promote technological advancement, and solidify the United States' position in the international economic landscape

What’s Left for Investors in 2025?

With the step-up in basis benefits expired and the 2026 deferral deadline approaching, many investors wonder if the Opportunity Zone program still provides meaningful advantages. The short answer is: yes, but only under the right conditions.

Here’s why OZs are still attractive in 2025:

• The Tax-Free Exit Remains the Biggest Benefit

  • While the deferral period is ending soon, investors who enter an OZ deal now and hold for at least 10 years can still eliminate all capital gains tax on appreciation.

• Capital Gains Deferral Is Still in Play

  • Investors with capital gains from 2024 or early 2025 can still defer taxes by rolling them into a QOF within 180 days of realization—giving them additional control over tax planning.

• Market Conditions Favor Select OZs

  • Investors should focus on high-growth areas within OZs, such as parts of Austin, Nashville, and Miami, where demand remains strong.

Risks & Considerations Before Investing in an OZ

While the tax advantages of OZs are significant, investors should proceed with caution and consider the following:

1. Long-Term Capital Commitment

   • To realize the full tax benefits, an investor must hold the OZ asset for at least 10 years—making it illiquid compared to other real estate investments.

2. Not Every OZ is a Good Deal

   • Some designated OZs lack economic drivers for sustainable growth, meaning investors could be stuck in underperforming assets despite the tax incentives.

3. Regulatory Uncertainty

   • While there has been bipartisan support for extending or modifying the OZ program, no concrete legislative action has been passed yet.

Economics

Tariffs Boost Real Estate Interest

The recent implementation of 25% tariffs on imports from Canada and Mexico, along with a 20% increase on Chinese goods, is creating significant ripples across the U.S. economy. Collectively, these nations account for 41.5% of total U.S. imports. John Chang, national director of research and advisory services at Marcus & Millichap, highlights concerns over potential inflationary pressures and a deceleration in economic growth. The Atlanta Federal Reserve Bank's latest projections indicate a 2.8% contraction in GDP for the first quarter, underscoring the potential economic ramifications.

Beyond immediate economic indicators, the prevailing uncertainty stemming from these trade policies poses broader challenges. The current uncertainty index has surged to its second-highest recorded level, surpassed only by the peak observed during the pandemic. This heightened ambiguity complicates strategic planning for businesses and investors, leading to a more cautious approach in decision-making processes.

Interestingly, this environment of uncertainty is also driving increased interest in real estate as a stable investment vehicle. Investors, seeking refuge from volatile markets, are turning their attention to tangible assets like real estate, which historically offer more predictable returns during turbulent times. This trend suggests that, despite the challenges posed by current trade policies, opportunities within the real estate sector may emerge as investors recalibrate their portfolios to mitigate risk.