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New Census Tract Data Raises Questions for OZ Stakeholders
Recent releases from the U.S. Census Bureau have piqued the interest of opportunity zones (OZs) stakeholders and raised a number of questions. Changing census tract boundaries, as a result of the 2020 Census, lies at the heart of the questions being posed. As of this writing, the Internal Revenue Service (IRS) and the Treasury Department (Treasury) have yet to clearly address the extent to which adjustments of census tract boundaries will affect the location-based OZ incentive.
Census tracts serve as the foundation for the OZ incentive. In July 2018 Treasury certified 8,762 individual census tracts across all 50 states, six territories and DC as qualified opportunity zones (QOZ), with two additional tracts in Puerto Rico added June 15, 2019, for a total of 8,764. These QOZs were generally chosen by governors from a wider universe of qualifying low-income census tracts (LICs) based upon the 2010 Census (a small number of tracts contiguous to LICs were also eligible for nomination). Under the law, a designation as a QOZ remains in effect from the date of the designation until the close of the 10th calendar year beginning on or after such date of designation – meaning the QOZ designation will remain in effect until Dec. 31, 2028.
Census tracts are redefined each decade through the Census Bureau’s Participant Statistical Areas Program (PSAP). The PSAP utilizes local committees–Local Census Statistical Areas Committees–to review census tracts boundaries and make recommendations to modify the boundaries and names for statistical geographic areas, based on Census Bureau criteria and guidelines. Modifications can include census tract merges, splits and boundary changes or combinations of these. Changes to census tract boundaries can sometimes result in renumbering. When a census tract is split, the split parts usually retain the basic number but receive different suffixes. Combined census tracts are issued a new census tract number. Small changes to individual census tract boundaries usually do not result in census tract numbering changes.
Implications of 2020 Census Data on QOZs
As of this writing, new census tract boundary data has been released for 8,688 of the 8,764 qualified OZs, including those from all 50 states, the District of Columbia and Puerto Rico. The only boundary data pending release are census tracts in American Samoa, Guam, the Northern Mariana Islands and the Virgin Islands. Novogradac has tentatively determined that there was no change in the geographical area of 43.4% (3,769) QOZs. The remaining QOZs, for which there is data, either split into two or more tracts or increased or decreased in geographic area.
For the 1,332 (15.3%) qualified OZs that were split into two or more tracts in response to the 2020 Census, these newly defined tracts have new census tract numbers – meaning the census tract number included in the final QOZ designation list no longer exists.
In addition to the splits, 20.9% of QOZs increased in geographic size and 20.4% decreased.
The following illustration displays how the redrawing of census boundaries for the 2020 Census affects two QOZs in downtown Pittsburgh – one QOZ increasing in geographic size and another being split into two new census tracts.
Note that when census tract (CT) 103 splits into two new census tracts, the new tracts will now be identified as CT 103. 01 and CT 103.02–CT 103, the original tract number, will no longer exist. The Novogradac Opportunity Zone Mapping Tool has been updated to identify QOZ tracts with boundary changes. The new census tract boundaries can be viewed on the Census Bureau’s mapping site.
Definitive guidance which addresses the extent to which adjustments of census tract boundaries will affect the OZ incentive has yet to be provided by the IRS and Treasury. As a result, OZ stakeholders are confused about the effect of these changes on future investments – prompting many questions like, “If the original geographic area of a QOZ census tract expanded as a result of the 2020 Census, does the new area qualify for OZ investment?” or “If the original geographic area of a QOZ census tract contracted, do the original boundaries that are now outside the zone still qualify for OZ investment?” or “If a QOZ is renumbered due to a split, do the original boundaries still qualify for investment?” Unanswered questions like these are likely to lead to varying responses by different taxpayers.
Looking forward, Novogradac expects the IRS and Treasury will issue guidance regarding the effect of census tract changes on QOZs once all census tract data is made available – as of this writing, data on census tract changes for U.S. territories is still pending. The effect of census tract changes on QOZ appeared on Treasury’s 2020-2021 Priority Guidance Plan. It is vital that IRS and Treasury act quickly as delaying the guidance is likely to impede investment given the sheer number of QOZs boundaries (56%) that have been affected by the Census.
In the meantime, to provide Novogradac clients and other OZ stakeholders with the best information available, Novogradac has updated its Opportunity Zones Mapping Tool to allow users to identify QOZs that have had boundary changes as a result of the 2020 Census. Future updates will illustrate the 2020 QOZ boundaries once this data is made available.
In addition, The Novogradac OZ Working Group is recommending to IRS and Treasury that clear guidance be issued on the interaction of qualified OZs with 2020 Census changes. First and foremost, the working group proposes that the designation of a QOZ shall apply to the original boundaries in effect at the time the QOZ was designated notwithstanding whether QOZs have been split or decreased in size. Furthermore, allowing for investment in the expanded portions of QOZs to qualify for the incentive will likely boost investment in low income communities - the primary purpose of the incentive. Whichever path is taken, the core priority should be to ensure that existing investors are not harmed and new investment is not curtailed in QOZs.
The Novogradac OZ Working Group will continue to maintain a leadership role within the OZ industry by monitoring emerging issues such as the effect of Census tract changes on QOZs and providing recommendations for guidance around such issues. To be a part of the discussion, visit the OZ Working Group homepage for details about the group and information on how to join.