A real estate tax shelter that aided Detroit projects has been made permanent — with big changes

Credit: CoStar Group Inc.
The Chroma buidling in Detroit’s Milwaukee Junction neighborhood received Opportunity Zone equity funding.

A controversial 2017 provision of a signature Trump administration law allowing people to shelter capital gains from taxes in exchange for investment in low-income areas has been permanently codified into the tax code — with some big changes.

In all, because of stricter Opportunity Zone designation requirements, there will be fewer such zones starting Jan. 1, 2027, across the city, metro Detroit, the state and the country, and they will favor rural vs. non-rural areas as increased tax benefits and less-stringent investment requirements are offered to investors in a new class of investment funds.

In addition, there will be transparency and accountability measures added to the program, a lack of which has long been a target of criticism. Plus, a provision that allowed wealthier areas — parts of downtown Detroit, for example — to reap the benefits because they share a border with lower-income areas has been stripped from the law.

When they were enacted, Opportunity Zones were touted as a key step toward propping up areas that had long struggled, for countless reasons.

Yet for all the ballyhoo — last year, now-President Donald Trump described them as “one of the greatest programs ever for Black workers and Black entrepreneurs,” during an appearance at a National Association of Black Journalists conference — and claims of $100 billion or more of investment tied to them, they haven’t been silver bullets leading to widespread housing and other economic development in areas that could use it, both in the city and the suburbs.

“This funding is pretty elusive,” said Mike Randall, executive director of the Grandmont Rosedale Development Corp., which works in the cluster of northwest Detroit neighborhoods with pockets of stately brick homes around the Southfield Freeway/M-39 and Grand River Avenue.

The neighborhoods aren’t without their challenges, of course. And even though a few of the U.S. Census tracts there were designated as what are known as Qualified Opportunity Zones, Randall wasn’t aware of a single deployment of QOZ capital in the area.

More broadly in Detroit, if you look at commercial real estate projects that are known to have used QOZ equity, you’ll see a handful of new and rehabbed buildings in areas where investors had for years seen potential for profit.

Think: Corktown (The Corner), Lafayette Park (Lafayette West), Milwaukee Junction (Chroma), Midtown (the former Thomas Jefferson Intermediate School/Jefferson Hub project) and others.

And sure, on a lesser scale, you can also think of new single-family housing in the East Village neighborhood just a block outside of the swank Indian Village enclave, and a redeveloped Kingsley Arms and Lee Arden apartment buildings in Detroit’s Piety Hill neighborhood sandwiched between Virginia Park and Boston Edison.

“It didn’t take bad projects and make them good,” said Ryan Zampardo, partner of Inkwell Partners LLC, which worked on the Piety Hill buildings and others. “But it got capital off the sideline that may not have considered investing in Detroit.”

Valerie Grunduski, partner and tax director of the Detroit office of Plante Moran, agreed.

“Just being a designated zone isn’t going to cause investment if there wasn’t interest in that sort of project in the first place,” Grunduski said.

Credit: Nick Manes/Crain’s Detroit Business
The Lafayette West project in Detroit’s Lafayette Park neighborhood includes apartments and condos.

Fewer zones

Under the new rules signed into law earlier this month, there will be fewer such targeted areas, or Qualified Opportunity Zones.

Michigan is expected to lose perhaps 26.4% of its QOZs under the new version, which Trump enshrined as part of his tax and spending legislation called the One Big, Beautiful Bill Act. That’s according to the Economic Innovation Group, a think tank tied to Dan Gilbert, the Detroit billionaire real estate and mortgage mogul, created in 2013 that pushed for the first incarnation of Opportunity Zones.

Gilbert’s team at Bedrock LLC, the real estate development and management company, did not respond to a request for an interview or comment about the program and its recent changes.

According to EIG, an estimated 28.1%, or 849, of Michigan’s U.S. Census tracts are expected to meet the new QOZ designation criteria, which lowers the median family income required. An estimated 212 are expected to be selected.

Under Opportunity Zone rules as part of the 2017 Tax Cuts and Jobs Act, which first put Opportunity Zones into law, Michigan had 1,152 eligible tracts with 288 designated.

Backers say Opportunity Zones helped spur at least $100 billion in investment nationwide, although critics have argued that they lead to investment in areas that were already seeing it, and that oversight was lax, if not nonexistent. Critics argue that the total investment in Opportunity Zones so far comes nowhere close to $100 billion.

So the question becomes, is the juice worth the squeeze, said Andrew Guinn, assistant professor in the Wayne State University Urban Studies and Planning department in Detroit.

“As a policy, I don’t think it hurts, but I don’t think that it lives up fully to promises or intentions of reducing poverty and promoting urban economic development on its own,” Guinn said. “It’s a mixed bag.”

Credit: Kirk Pinho/Crain’s Detroit Business
The mixed-use The Corner development on the former Tiger Stadium site in Detroit’s Corktown neighborhood includes residential units with ground-floor retail.

The juice

In this case, the juice is economic investment in low-income areas that have seen disinvestment.

To get to it, you have to squeeze through a complicated combination of rind and fruit that involves governors designating certain areas as Qualified Opportunity Zones based on median family income and poverty rates and establishing a graduated capital gains tax deferral granted by placing those investor gains into special funds to invest in those areas through things like commercial real estate and business development.

There are different regulations for metropolitan QOZs vs. a new classification called Rural Qualified Opportunity Zones, or RQOZs, which get beefier tax benefits for investors. Governors are also required to designate RQOZs as one-third of the Opportunity Zones they designate, a new rule under the One Big, Beautiful Bill Act.

The new law also adds reporting requirements that have long been demanded.

The U.S. Department of Treasury, under the OBBBA, will be required to create annual reports on the number of QOFs and their assets, according to the EIG. Other required data includes the number of designated QOZs and RQOZs and their confirmed investments, plus information on investment sectors, housing units created and employment impacts, the EIG says.

In addition, other more long-term reporting requirements include measuring the “socioeconomic performance” of QOZs vs. comparable non-QOZs based on things like job creation, poverty rates, income, housing and business formation, according to the EIG.

The squeeze

Opportunity Zones are complicated tools that, in general, reward patient money.

Here’s the recipe.

First, Gov. Gretchen Whitmer and her colleagues in governors’ mansions across the country will start nominating to the U.S. Department of Treasury eligible U.S. Census tracts to be designated as Qualified Opportunity Zones. The treasury secretary must sign off on those nominations.

Whitmer and other governors may only nominate 25% of the eligible Census tracts in their states for QOZ designation, and they are required to nominate at least 25 of them.

In order to be a QOZ under the new rules, a Census tract must meet one of the following criteria:

Either have a median family income below 70% of the state in non-metropolitan areas, or the metro in metro areas. That’s a reduction from 80% of the median family income in the original 2017 Opportunity Zone legislation.
Have a poverty rate of 20% or greater and be below the 125% median family income at the state level for non-metro areas or the metro area. The latter, according to the Economic Innovation Group, is a new provision designed to eliminate a provision that let some high-income Census tracts be designated as Opportunity Zones if they sat adjacent to an eligible tract.

Once those are designated and certified, tax havens known as Qualified Opportunity Funds, or Rural Qualified Opportunity Funds, can start investing in those areas using tax-deferred capital gains.

Credit: Economic Innovation Group/U.S. Census Bureau data
A map prepared by the Economic Innovation Group of census tracts that would be eligible to become Opportunity Zones under the 2025 budget bill. Zones in yellow would qualify if designated by the governor and approved. Not enough information is available to determine eligibility for the zones in gray, the group said.

The rural rules

This time around, rural areas are receiving special treatment.

Capital gains investors are expected to get a bigger tax break if they invest in designated rural areas, although the definition of “rural” seems a bit squishy.

The QROZ areas must meet the income/poverty requirements established, but also be areas “outside cities or towns with populations over 50,000 and not adjacent to urbanized areas.”

That would leave some wiggle room and discretion for the U.S. Treasury Department on what precisely qualifies as rural.

Qualified Rural Opportunity Funds are also required to have 90% of their assets entirely within Rural Qualified Opportunity Zones. Improvements on a property in a rural zone need only be 50% or more of its purchase cost, rather than double.

Money talks

Under the new law, if the gains stay within the fund for at least five years, the investor has to pay federal capital gains taxes on 90% of the original income. Under the previous incarnation of the law, an investor would only pay capital gains taxes on 85% of the investment if the money stayed in the fund for more than seven years. That provision has been eliminated under the new rules.

Rural development comes with an extra perk now. For rural zones, if the gains stay within the fund for at least five years, the investor has to pay federal capital gains taxes on just 70% of the original income. There was no such special designation or treatment for rural zones in the original law.

There’s an extra carrot for investors if they leave the money in the fund 10 years or longer: They don’t have to pay any capital gains tax on the appreciation of the Opportunity Fund, in addition to getting the 90% rate or 70% rate on the original investment. If they pull that money out before then, they pay normal capital gains tax on the fund’s appreciation.

To put it more concretely: A $1 million profit from a Jan. 3, 2027, stock sale would hit an investor with a $238,000 tax bill in 2027. Yet if the investor put the $1 million capital gain into an Opportunity Fund, which then invests in a building in an Opportunity Zone instead, and that investment remains there until the end of 2037, the investor only pays taxes on $900,000, or 90% of $1 million. If the investment is in a Rural Opportunity Fund and a building within a Qualified Rural Opportunity Zone, they only pay taxes on $700,000, or 70%, of $1 million.

That means a tax liability of just $214,200 in 2032 on that gain at a rate of 23.8%, or $166,600 if the investment is in a rural area.

However if that investment is held until 2038, for example, and the building sells for $3 million in 2038, the entire $2 million of gain on the Opportunity Zone investment would be tax-free, and the investor would only be required to recognize $900,000, or 90% of original $1 million, of gain on Dec. 31, 2032.

Making projects possible

For some like Detroit-based Method Development LLC, Opportunity Zone funding proved invaluable.

The team headed up by Amelia Patt-Zamir and Rakesh “Rocky” Lala has been working on projects not just in downtown Detroit but also areas like Corktown, west of the central business district, plus Brush Park north of the CBD and Jefferson Chalmers on the far-east side.

The program “didn’t just support our work — it made it possible,” Patt-Zamir said.

“Back in 2017, traditional debt and equity weren’t backing projects like these. (Qualified Opportunity Fund) capital gave us the ability to move early and invest in overlooked buildings and blocks with long-term potential,” Patt-Zamir said.

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