The proposed regulations on opportunity zones issued by the Internal Revenue Service and the Treasury Department last week could unlock greater real estate investment in low-income communities and give business investors a chance to reap tremendous profits with their taxes deferred for years into the future. The impact on communities around the country could be far-reaching, driving up property values but also potentially making places to live less affordable.
The qualified opportunity zones are part of the Tax Cuts and Jobs Act of 2017, but they also build on tax breaks for what used to be referred to as “empowerment zones.” The proposed regulations issued last week permit the deferral of all or part of again invested in a Qualified Opportunity Fund or QO Fund, that would otherwise be includible in income (see IRS issues guidance on opportunity zone investments and Trump’s opportunity zone rules deliver on investors’ wish list). The gain is deferred until the investment is sold or exchanged or Dec. 31, 2026, whichever date comes earlier. If the investment is held for at least 10 years, investors may be able to permanently exclude the gain from the sale or exchange of an investment in a QO Fund. The new guidance also makes it easier for opportunity zone funds to ensure compliance with the requirement that a fund has 90 percent of its assets invested in opportunity zones and expands the working capital safe harbors. The proposed regulations also provide clarity on treatment of gains on long-term investments, ownership and operation of the business, and what constitutes “qualified opportunity zone business property.”
“I really think that it addresses some more of those gating items that have maybe been holding up investors from really investing or the market from taking off,” said Joseph Bredehoft, a partner in the St. Louis office of the law firm Husch Blackwell. “Some of those are the 50 percent gross income requirement. Some of the items around vacant land and land use, reinvestment, allowing lease property to qualify as qualified opportunity zone property, and then allowing a qualified opportunity fund more of a ramp-up period to invest its capital without violating the 90 percent requirement, which is especially helpful when a fund is being capitalized in the latter part of the year. It gives a little bit more of a runway for the fund to be able to deploy its capital in a qualified opportunity zone property.”
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Article written by: Micheal Cohn | April 23. 2019