Hidden OZ Tax Advantages Most Investors Are Missing

JAJimmy Atkinson·March 25, 2026 · 6 min read

Most Opportunity Zone investors treat the program as its own isolated thing — but OZ is really an overlay on the pre-existing tax code, and understanding that interaction is where the real edge is.

Jonathan McGuire, CPA at Aldrich Advisors, joins the show to break down Section 280B demolitions, bonus depreciation and cost segregation, partial disposals, and why operating businesses have seen so little OZ investment. Plus, what to watch as OZ 2.0 zone designations begin to take shape.

Guest: Jonathan McGuire

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Hosted by OpportunityZones.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in the Opportunity Zones industry.

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Episode Summary

Jonathan McGuire, a CPA at Aldrich Advisors and leader of the firm's real estate and private equity group, joins Jimmy on the Opportunity Zones Podcast to discuss how the existing tax code layers on top of — and interacts with — Opportunity Zone investments. Jonathan describes OZ as "an overlay on the pre-existing tax code," with the OZ rules acting as a filter through which all the other "pages upon pages of legalese" still apply. The conversation covers Section 280B demolitions, bonus depreciation and cost segregation, partial disposals, OZ operating businesses, and what to watch as OZ 2.0 takes shape.

Section 280B and the Demolition Strategy

Jonathan explains that Section 280B has been part of the tax code for quite some time. The rule says that if you demolish a building, rather than taking a loss on the demolished building, you must capitalize whatever remaining building basis exists into the cost of the land. The premise is that if you're buying land and a building only to demolish it the next day, you're effectively buying the land value, not the building value.

In the OZ context, this creates an opportunity. Using a hypothetical $3 million acquisition — $1 million allocated to the building, $2 million to the land — if you demolish the building, that $1 million building basis shifts over to land, resulting in a $3 million land basis. Land is always deemed to be original use under the OZ rules. Once the building is gone, Jonathan argues it is "incapable of being held" as an asset, so the substantial improvement requirement no longer applies. Everything, including the land, can count as original use from day one.

This matters because it eliminates the 30-month substantial improvement period and its associated cost requirements. As Jonathan puts it: "If you're going to fail one of those two, but you have a deemed demolition, then all of a sudden I've got an advantage there."

Defining Demolition: The 75% Threshold

Jonathan notes that a revenue procedure from the mid-1990s defines what constitutes a demolition for tax purposes. If at least 75% of the existing exterior walls and interior structure are maintained, the building is treated as an existing building. If less than 75% is maintained — meaning more than 25% is demolished — it triggers a deemed demolition for tax purposes, allowing the full building basis to be moved into the land bucket, even if portions of the structure are still standing.

Contributed Property and 280B

Jonathan identifies a second, less obvious application of 280B: enabling contributed property to function inside a QOZ business. Contributed property normally does not qualify for OZ purposes because qualified assets must be acquired by purchase. But if a property owner contributes land with an old dilapidated building, demolishes it, and capitalizes the building basis into the land, then whatever new structure is built on that land has original use. As long as the new construction represents at least 70% of the overall project cost basis, the contributed land can function as part of a qualifying OZ project — even though the contributed portion itself doesn't meet the standard tests.

Bonus Depreciation, Cost Segregation, and OZ

Jonathan says he automatically thinks about cost segregation studies for any building costing over $500,000, with study costs typically ranging from $8,000 to $12,000. A cost segregation study breaks a building's components — furniture, fixtures, equipment — into shorter-lived depreciable buckets of 5, 7, or 15 years rather than 27.5 or 39 years.

Under the "one big beautiful bill" (OB3), 100% bonus depreciation was reinstated retroactively for assets placed in service on or after January 19th or 20th of 2025. This allows 15 to 30 percent of a building's cost to be pulled out and expensed in year one.

The OZ-specific benefit is that the depreciation recapture that would normally accompany this accelerated deduction is eliminated after the 10-year hold. Jonathan explains: "If my basis is now equal to the fair market value, I recognize no gain. So from that, I don't have to pay any depreciation recapture tax." Two types of recapture would otherwise apply: 1245 recapture (taxed at ordinary income rates up to 37%) for non-building components, and unrecaptured 1250 gain (taxed at 25%) for straight-line depreciation on the building itself. In an OZ, both disappear.

Partial Disposals

Jonathan points to the Tangible Property Regulations (also called the Repair Regs), finalized around 2013–2014, as enabling partial disposals. Prior to those regulations, if you replaced a roof, you had no clean way to dispose of the old one unless you had a cost segregation study isolating that component's cost. The new rules introduced methods — including a producer price index discounting approach — to estimate the original cost of a replaced component and deduct the remaining basis when it is disposed of.

In a non-OZ context, this is particularly powerful because disposed components are incapable of being held and therefore carry no depreciation recapture. In the OZ context, the benefit is somewhat reduced, but partial disposals must still be considered carefully because disposing of too much can trigger 280B — the two rules interplay.

OZ Operating Businesses: Why So Little Investment?

According to a recent Novogradac survey that Jimmy cites, only roughly 3% of all OZ equity raised since program inception has gone into operating businesses. Jonathan identifies two primary reasons. First, the gross income test — requiring that 50% or more of gross receipts be earned inside an OZ — is far harder to meet for a business than for real estate, which doesn't move. Tracking income zone by zone is a burden that clients already struggle with on a state-by-state basis for apportionment purposes.

Second, the 10-year holding period is a long time in the world of venture capital, especially when Section 1202 (qualified small business stock) offers a tax-free exit after only 5 years, with fewer operational compliance requirements. Jonathan notes that 1202 has "a tried and true playbook," which leads some investors to stick with what they know.

Jonathan still sees strong upside potential in OZ businesses — "real estate kind of has a cap on it, businesses do not" — and believes that was the original intent of the program: to incentivize business growth in low-income communities. But he acknowledges that real estate needed to come first to build the infrastructure necessary to attract people and businesses to those areas.

Watching OZ 2.0

As OZ 2.0 designation approaches, Jonathan says he is most focused on which zones will be selected and who is driving that process at the state level. Governors have final approval, but Jonathan is paying attention to which economic entities and forces are influencing those decisions. He emphasizes that states should be bringing together voices from urban centers and rural counties to identify what will produce the best economic activity overall, and calls out Oregon specifically as a state that needs to take advantage of the opportunity given its current economic challenges. "The states that are going to actually sit down and take advantage of this," Jonathan says, "are probably the states that you want to do business in."

Jimmy notes that OZ 2.0 zone nominations are expected to begin on July 1, with the new map going live on January 1, 2027.