The U.S. Department of the Treasury has issued its much anticipated second set of proposed regulations related to the new opportunity zones tax incentive. To coincide with yesterday’s release, the White House held an opportunity zone conference attended by President Donald Trump, Mnuchin and Housing and Urban Development Secretary Ben Carson, who also chairs the White House Opportunity and Revitalization Council.
The tax benefit, created by the 2017 Tax Cuts and Jobs Act, is designed to drive economic development and create jobs by encouraging long-term investments in economically distressed communities nationwide. There are currently 8,761 designated opportunity zones located throughout the U.S. and its five territories.
“We are pleased to issue guidance that provides greater flexibility for communities and investors as we continue to encourage investment and development in opportunity zones,” said Treasury Secretary Steven Mnuchin. “This incentive will foster economic revitalization, create jobs and spur economic growth that will move these communities forward and create a brighter future.”
At yesterday’s opportunity zone conference in Washington D.C., President Trump pointed out that the program is already having an impact with respect to increased wages and property sale prices.
“Across the country, our tax cuts have kicked off a race to invest in opportunity zones beyond anything that anybody in this room even thought,” said Trump. “In counties with heavy concentration of opportunity zones, wages have risen by now — it seems that we were talking about 8 percent, but it looks like it’s going to be a much higher number than that.”
He added, “Property sale prices in opportunity zones, if you have a home, have already skyrocketed by more than 20 percent. Secretary Mnuchin estimates that private businesses will invest $100 billion in opportunity zones, and that’s going to be in a fairly short period of time.”
The proposed regulations allow the deferral of all or part of a gain that is invested into a qualified opportunity fund. The gain is deferred until the investment is sold or exchanged or December 31, 2026, whichever is earlier. If the investment is held for at least 10 years, investors may be able to permanently exclude a gain from the sale or exchange of an investment into a fund.
“The guidance makes it easier for 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, Treasury said in a statement. “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.”
A key part of the newly released guidance clarifies the “substantially all” requirements for the holding period and use of a tangible business property.
Qualified opportunity zone (QOZ) business property is tangible property that is used in a trade or business of a QOZ fund. The property must have been acquired after December 31, 2017 to qualify as QOZ business property and at least 70 percent of the property must be used in a qualified opportunity zone.
Tangible property must be QOZ business property for at least 90 percent of the fund’s or business’s holding period. The partnership or corporation must be a QOZ business for at least 90 percent of the fund’s holding period.
The guidance notes there are situations where deferred gains may become taxable if an investor transfers their interest in an opportunity zone fund. For example, if the transfer is done by gift, the deferred gain may become taxable. However, inheritance by a surviving spouse is not a taxable transfer, nor is a transfer upon death to an estate or a revocable trust that becomes irrevocable upon death.