If Biden Wins, What Happens to Opportunity Zone Benefits?

By Clint Edgington

While this isn’t the place to argue about what’s best for public policy, it is our job to help folks analyze how political outcomes could impact their investments. That includes the most important outcome: their returns after they’ve paid the tax man. 

For those with capital gains, the analysis should include Qualified Opportunity Zone Funds (QOZF) like our Nest Fund. The ability to defer and reduce your current capital gain and sell your QOZF without paying any capital gains is an amazing opportunity. 

But if you could pay lower tax rates today, does it make sense to defer them if rates go up? In short, yes! While the payment on your original capital gain reduces the benefits, the tax-free exit of the QOZF more than makes up for it.

No Change Likely with a Trump Win

Trump has pledged a continuation of the bipartisan Opportunity Zone program to spur investments in economic development initiatives such as affordable housing, which is the Nest Fund’s focus in Lexington, KY and Columbus, OH.

Biden Supportive of Opportunity Zone Program

Biden is generally supportive of the QOZ program as a tax-advantaged way to invest in challenged neighborhoods to help them move towards prosperity. He has recommended a few changes that don’t impact investors. For example:

• Incentivizing partnership with community organizations
• Connecting tax incentives to clearer social benefits, which seems reasonable, though Biden’s position is vague
• Adding more detail and disclosure of community impacts in Opportunity Zones reporting requirements, which we support

Biden May Raise Capital Gains Taxes

Biden hasn’t presented a complete tax plan. But per the stated Biden capital gains policy, he would increase income tax rates for high earners^[1] and tax capital gains as ordinary income, effectively moving the top capital gains rates from 20% to 39.6%. He has also stated he will not raise taxes for those making less than $400,000.

To realistically enact this, Biden must win and the Democrats must gain control of the Senate and maintain control of the House. It’s possible that some moderate Democrats would oppose this.

So, Does This Change the Benefit of Investing in a QOF?

On the one hand, paying capital gains taxes today at 20% seems like a better option than paying them at 39.6% in 2026 under the proposed Biden cap gains tax plan – even when we include the Opportunity Zone benefit of a 10% reduction in your capital gain.   

However, remember that the major benefit of the QOZF is that any gains on the investment in the zone are tax-free in 10 years. That’s true under the current law, whether the cap gains tax rate is 20%, 39% or something else at that time. For that reason, if rates are higher in 10 years, the tax benefits of being in the QOZ will be even better vs. other investments.

So What if the Tax Rate Goes Up?

Here’s an example of how investing in a QOZ still comes out ahead, even at the highest projected rates.^[2]

Scenario: Let’s assume 2 equal partners, Jack and Jill, sell their practice for $2,800,000, and it generates a capital gain of $2,000,000. They each get $1,400,000 in cash, of which $1,000,000 is a capital gain.

Jack and Jill partnered again on buying a property in a Qualified Opportunity Zone in their own Qualified Opportunity Zone Fund, the “J&J OZ Fund.” Jack was concerned about higher cap gains taxes and invested conventionally, and Jill opted to use the QOZ legislation.

By investing into a Qualified Opportunity Zone, Jill came out ahead by $331,593! Pretty easy to see the winner here, even with the highest proposed tax rate for the highest earners.

Conclusion

While there is less benefit to deferring your capital gains by investing in a Qualified Opportunity Zone if tax rates go up, the major benefit of the QOZ legislation is the tax-free exit at the end, which becomes more valuable in a higher tax environment. No matter who wins the upcoming election, Opportunity Zones are a great option for patient investors. At Nest, we’re taking a prudent, thoughtful approach to help our investors succeed.

With no obligation, we can help you run various detailed scenarios to see how potential changes in the laws related to capital gains and QOZs might impact your investment decisions.

We welcome your questions, comments and inquiries. Just fill out the Contact Us page on this website.

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[1] Those making over $400,000 annually

[2] For purposes of simplicity, we ignore the benefit Jack and Jill would have equally received of the depreciation deduction over time as it would net out.

[3] Jill’s capital gain of $1,000,000 from the sale of her dental practice would be payable in 2026. As it was invested in a QOZF, it is reduced by 10% for a taxable capital gain of $900,000. At a 39.6% rate, it would result in a tax liability of $356,400.

[4] Assuming hypothetical capital gains tax of 39.6% and depreciation recapture rate of 25%.