The Opportunity Zone law, which took effect last year, allows the deferral of all or part of a capital gain (and therefore the taxes) that is invested into a Qualified Opportunity Fund. The gain is deferred until the investment is sold or exchanged or Dec. 31, 2026, whichever is 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 the investment.
President Donald Trump said in announcing the rules. “Nobody thought it was going to catch on like it’s going on,” and that the program is “anticipated to spur $100 billion in private capital investment.”
The new guidelines provide details on aspects of rules that have gone unspecified since the law took effect. Some early takeaways from initial press reports has the following takeaways:
1. Funds will get additional leeway to invest capital on a more flexible timeline;
2. Funds will have a one-year grace period to sell assets and reinvest the proceeds, thus avoiding penalties intended to prevent funds from sitting on the cash;
3. Funds will have more flexibility to include more than one investment in a fund;
4. Investors will get special tax treatment if they’ve held their stake in the fund for at least 10 years, even if the fund didn’t own the asset for a full decade;
5. Requirement that businesses generate at least half their gross income within their opportunity zone will be changed. Treasury will allow businesses to qualify if at least 50 percent of the hours the employees work are within the zone, as long as it performs at least half of the its services within the area, or if there are significant management and operational functions present.
6. No penalty if investor dies and passes an interest in an OZ Fund to their heirs; and
7. Working capital safe harbor can be used for development of an operating business, not just a real estate project.
“Hopefully there should be enough guidance that came out today that people are now ready to invest,” Treasury Secretary Steve Mnuchin said in discussing the new regulations. “It may not be for every single investment type that we’ve provided clarity, but we’ve provided clarity for an awful lot.”
Mike Ballard, Partner in Ascent Multifamily and a Managing Director For Sixty West Funds, said he was surprised by how favorable the new regulations are toward businesses.
“There is no question Treasury continued to take a business-friendly stance in interpreting the underlying law that was passed in 2017,” he said.
Those new regulations were welcomed by Tom Wucherer, local architect and developer. Wucherer is developing several sites for mixed-use developments in Opportunity Zones as a result of this legislation. His first is a $30 million restaurant, office and apartment development on Water Street in downtown Henderson.
Accountants, lawyers and opportunity funds have begun combing through the 169 pages of new guidelines. The Treasury Department and the IRS emphasized that they are continuing to request comments on the guidelines.
There were some indications from the Treasury Department recently that a third round of guidelines could be issued in the third or fourth quarter of this year.