ABSTRACT
Established by the Tax Cuts and Jobs Act of 2017 (TCJA),1 qualified Opportunity Zones (OZs) are a new place-based community development program that attempts to help economically challenged areas by encouraging private capital investment through the use of tax incentives. Although the program started at the beginning of 2018, implementation of the program has been slow, creating challenges for investors. The program's structure may have also inadvertently created an environment ripe for surging property prices. This unintended consequence has the potential to reduce or eliminate investor tax benefits, stimulate community gentrification, and diminish affordability for residents. Recent studies have found evidence of material price "premiums" for some commercial real estate properties located in OZs (Pierzak, 2021;Sage, Langen, and Van de Minne, 2019). Recognizing the policy's potential in driving increased investor interest in single-family home rentals, the authors of this study explore the impact of the program on existing single-family house prices and find that the community development program has led to excess home price appreciation totaling 6.8 percent from 2018 to 2020.
ABSTRACT
Qualified opportunity zones, or o-zones, were established by the Tax Cuts and Jobs Act of 2017. This new place-based community development program encourages the investment of private capital into economically depressed areas through the use of tax incentives. With significant tax-induced demand, a small “investment box,” and a closing (now closed) window of opportunity for full tax benefits, conditions have been ripe for accelerating o-zone property prices. This study examines the policy’s effect on transaction prices for existing market-rate apartment properties located in census tracts that were designated as o-zones. It finds that certain segments of the apartment investment pool located in o-zones experienced significant price increases between 2017 and 2019. With material sales price increases, the benefits related to tax savings, at least in part, have effectively been transferred to the sellers of these properties. This finding acts as a cautionary reminder to taxable investors. While tax benefits are alluring, investment decisions should not rely on tax incentives alone. Key Findings ▪ Qualified opportunity zones, or o-zones, were established by the Tax Cuts and Jobs Act of 2017. This new place-based community development program encourages the investment of private capital into economically depressed areas through the use of tax incentives. ▪ With significant tax-induced demand, a small “investment box,” and a closing (now closed) window of opportunity for full tax benefits, conditions have been ripe for accelerating o-zone property prices. ▪ This study finds that segments of the apartment pool located in o-zones experienced significant price increases between 2017 and 2019, suggesting that the policy’s tax benefits, at least in part, have effectively been transferred to the sellers of these properties.