Newly Proposed Opportunity Zone Regulations
Since the first announcement of the Opportunity Zones program, investors have watched with interest. But, the initial program guidelines were plagued with unanswered questions. On October 19, 2018, the Internal Revenue Service and U.S. Department of the Treasury updated the regulations in order to provide clarity and answer lingering questions.
What You Need to Know
It’s important to note these regulations are only proposed regulations and still subject to revision. That being said, here’s what you need to know:
- All opportunity zone designations expire on December 31, 2028. Investors who invest after 2018 may still meet the 10-year holding period, regardless of when the designation of their opportunity zone(s) expire.
- Opportunity zone assets may be held until January 1, 2048. The basis step-up election can be made even after December 31, 2028, when the opportunity zone designations expire.
- Investments in an opportunity zone must be exited by December 31, 2048.
- These regulations, while still proposed, can be considered reliable.
- Investors were previously unsure how to raise capital for a long-term project while also being required to deploy cash into that project within six months of purchase. Now, a safe harbor will provide 31 months to deploy cash.
- Land value is not included when calculating “substantial improvement,” only the value of the existing buildings when the land was purchased.
- Individuals, C Corporations, real estate investment trusts, partnerships, and certain pass-through entities (limited liability companies) are eligible opportunity zone investors.
- Partnerships may defer all or part of capital gains be investing in a qualified opportunity fund. Deferred gains can not be included in distributive shares among the partners.
- Investors may invest in more than one qualified opportunity fund.
- Deferring capital gains can be achieved by attaching Form 8948 to one’s federal income tax returns for the taxable year in which the gain would otherwise have been recognized.
What We Still Need to Know
While these new proposed regulations provide some much needed clarity, there are still ambiguities that need to be answered, including:
- Can ‘land banking’ be used to abuse the system? If a fund purchases a parking lot and improves the only building on it, the parking attendant’s shed, would the fund meet the test for “substantially improving” the property? See above bullet stating “land value is not included when calculating ‘substantial improvement.’”
- The “reasonable amount of time” in which a fund must be in compliance with the 90 percent asset test after selling opportunity zone property.
- The federal income tax treatment of any gains a qualified opportunity fund reinvests.
- The exact definition of “substantially all” where it is used in various sections of the regulations
- The exact definition of “reasonable period” in which a qualified opportunity fund must reinvest proceeds from the sale of qualified assets and not incur a penalty
- Specifics regarding how transactions may trigger inclusion of deferred gains
- Consequences of a qualified opportunity fund’s failure to uphold the required 90 percent investment standard
- Specifics of how information will be reported for the program
The Opportunity Zones program holds much potential, but is far from completely explained. Further regulations and clarifications have been promised. At Yormack Law, we will report and explains these regulations as soon as they are available.
Nonetheless, there’s no reason to wait to begin preparing yourself for this exciting program. As a firm built on expert advice and time-tested knowledge, we stand ready to guide you to best take advantage of the Opportunity Zones program. Get in touch with us today!
Adam Yormack, Esq., is the principle attorney at Yormack Law where he focuses on corporate and commercial litigation, franchise, and real estate law. You can reach Adam directly at firstname.lastname@example.org.
The materials in this article are provided for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any potential questions or concerns, etc.