Investors, property owners, real estate developers, and other businesses now have much clearer guidelines for how they can obtain tax benefits under the federal Opportunity Zone program. The IRS published the long-awaited regulations for the program in the Federal Register today following their original release to the public on April 17 and such publication may be accessed here.
The proposed regulations are in many ways friendly to taxpayers and are expected to result in a greatly increased volume of investment undertakings in economically distressed areas throughout the United States. By their publication in the Federal Register today, the time window for submitting comments on these rules will end on July 1.
Here is a sampling of the key ways the new proposed regulations bring clarity to businesses and investors availing of the Opportunity Zone program:
- The regulations provide three “safe harbors,” as well as a “facts and circumstances” test, for purposes of compliance with a requirement that at least 50 percent of the gross income of a qualified Opportunity Zone business come from the active conduct of a trade or business in an Opportunity Zone.
- Clarity is provided for investments in operating businesses, such as rules pertaining to permissible levels of working capital for such businesses.
- The guidance helps clarify that both cash and property may be invested in qualified opportunity funds (QOFs). In the instance of property contributed, the rules would establish that the Opportunity Zone benefits are limited to the tax basis of the contributed property.
- QOFs, under the proposed rules, would have a six-month period to invest capital received from investors provided that the capital is in the form of cash, cash equivalents, or debt instruments with a term of 18 months or less.
- Questions surrounding real estate are addressed, such as guidance that one requirement – that original use of tangible property in an Opportunity Zone commence with a QOF – is not applicable to land, whether improved or unimproved. And land does not have to satisfy a “substantial improvement” test.
- A special rule would enable real property that crosses out of the boundaries of an Opportunity Zone, into a non-Opportunity Zone, may nonetheless be treated as if located in an Opportunity Zone under certain conditions.
- Other rules address matters such as the treatment of Section 1231 gains and the enumeration of certain events that will cause an inclusion of deferred gain, and the rules provide quantitative percentages in instances for certain “substantially all” tests and the like.
These proposed regulations will encourage investment in new or refurbished projects across the designated Opportunity Zones, which cover parts of all 50 states, the District of Columbia, and five American territories. You can find a full list of the designated zones here.