Opportunity Zones: Gimmick or a Real Opportunity?

The IRS recently issued draft proposed regulations clarifying rules on deferring gain from investing in the opportunity zone program [click here for location of opportunity zones:
https://eig.org/opportunityzones ]. As a reminder, proposed regulations are not effective until final, but rather provide a glimpse into how the IRS is thinking. These proposed regulations are pro-taxpayer and should increase interest in this relatively new program.

In short, the opportunity zone program allows taxpayers to sell a capital asset and reinvest the gains in a qualifying opportunity fund (QOF), which is generally a traditional investment entity such as an LLC or preferred partnership. The QOF must hold at least 90% of its assets in qualified opportunity zone property, which includes business property within the opportunity zone and even equity interest in a business that qualifies as an opportunity zone business.

The benefits are three-fold, 1) gain on the sale of a capital asset can be deferred until December 31, 2026; 2) of that gain, 15% is excluded from income if the taxpayer keeps the investment in the fund for more than seven years; and 3) taxes on gain from the actual investment in the QOF held for 10 years is forgiven. At this point, to get all three tiers of benefits, the investment in the QOF should be made by December 31, 2019.

But wait, there’s more! The proposed regulations may allow taxpayers to hold their investment thought 2047 without losing the tax benefits.

Here is the kicker. The QOF must make “substantial improvements” to the opportunity zone property. This forced expenditure turned many taxpayers away from this opportunity. However, the proposed regulations provided that substantial improvements for land with a building on it is met if the basis of the building is more than doubled. That is a big deal, if the basis of the land is not included. This clarification alone may move many taxpayers into this program. Further, taxpayers have 31 months to make the substantial improvements, not six months.

Right now, the opportunity zone program has moved into a real opportunity. At risk of stating the obvious, you should consider an investment in its entirety, beyond the tax benefits. However, the tax benefits sure do sweeten the deal.

Post written by:
Stanton P. Geller
Culp Elliott & Carpenter, P.L.L.C.