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Opportunity Zones Offer Tax Loophole For Art Collectors

The purpose of the “opportunity zones” program is to revive 8,700 low-income neighborhoods by offering developers tax breaks when they invest their capital gains. But, since its launch nearly two years ago, critics have questioned who the program actually benefits: the residents of these neighborhoods or affluent people looking for a tax break?

A Bloomberg News report support the latter, with the Chicago-based investment firm Cresset Partners saying its billionaire art-collecting clients are looking at the opportunity zones program as an alternative to the 1031 tax exchange.

Cresset managing director Nick Parrish said his clients used the 1031 tax exchange to fund art purchases, since they could simply use the capital gains from a previous sale. It also allowed clients to defer taxes on capital gains as long as they kept buying and selling, but the passage of the Tax Cuts and Jobs Act of 2017 now limits 1031 tax exchanges to real estate only.

Parrish says affluent art collectors could take the capital gains earned from art sales and put them into an opportunity-zone fund for an existing business or upcoming real estate project. By investing into the fund, the clients would be able delay tax payments and save up to 15 percent on their taxes, if held for seven years or more.

“[The opportunity zones program is] a really interesting and flexible tool, which allows a collector to peel off the gain and invest into other businesses,” he said. “With all the capital gains on the American balance sheet, it could be one of the largest tax-incentive programs in U.S. history.”

Parrish said he’s yet to see anyone take advantage of the opportunity zones program, but his firm and others are expecting that clients will soon act on their curiosity. For example, Cresset has launched a $280 million fund for opportunity zone projects in seven cities, including Nashville, Portland, and Denver. Although the fund is open to all investors, the firm is pitching the benefits to individual collectors, galleries and auction houses.

A number of other art industry experts, lawyers, and accountants have echoed Cresset’s plan, with Art Fiduciary Advisors managing partner Doug Woodham explaining the benefit best: “Because the federal capital gains taxes on art and collectables is 28 percent, higher than the 15 or 20 percent rate on financial investments, gains from the sale of fine art are a particularly tax-efficient way to invest in opportunity zone funds.”

Cresset’s plan is an example of the criticism the opportunity zones program has faced, with some experts saying the program benefits the wealthy — not the residents of the low-income neighborhoods it’s supposed to bolster.

An analysis by Attom Data Solutions revealed that home prices continue to falter in 80 percent of opportunity zones, signaling that investments aren’t lining residents’ pockets through higher home prices and values. Eighty percent of zones with at least five sales per quarter since 2018 had a median home price below the current national average of $266,000. Another 40 percent had median home prices below $150,000.

“The differences between these and other areas in most parts of the nation are stark,” said Attom Chief Product Officer Todd Teta. “The numbers provide key benchmarks for how much room there is for these areas to grow and how much new investment they need.”

Another analysis by Zillow that took into account all opportunity zones noted a 20 percent increase in home prices, but highlighted the program could lead to gentrification that pushes out lower-income residents.

Zillow policy advisor Alexander Casey said it will take time to conclude the true impact of the opportunity zones program, but that current trends hold the clue to which communities will benefit the most long-term.

“What’s clear in the meantime is that among the vast array of neighborhoods selected as opportunity zones we’ve witnessed wildly different housing market trends up to this point, which might hint at the future of these communities,” Casey said.