Opportunity zones (OZ) have been met with widespread interest and enthusiasm with the potential for deferring tax on realized capital gains and the possibility that those investments can grow tax-free. Primior has remained on the cutting edge of this innovative opportunity created by the Tax Cuts and Jobs Act in December 2017, and now that the Department of Treasury issued a second set of proposed regulations regarding the OZ program we believe there is even more flexibility for the Opportunity Fund investor. The full guidance document was posted on the IRS website on April 17, 2019. Some of the highlights include:
Business operation within an Opportunity Zone
The requirement that 50 percent of the gross income from a qualifying business operating in an OZ must be generated within that OZ was found to be restrictive by many. The second round alleviated many of these concerns by providing safe harbors where businesses could qualify if:
- 50% of the business’ services, as measured by the total hours worked by employees and contractors occurs in the OZ, or
- 50% of the services as measured by compensation paid occurs in the OZ, or
- the tangible property and management functions of the business occur within the OZ.
Assets held in an Opportunity Zone
The requirement that individual OZ assets must be held for 10 years to receive the maximum tax benefits was clarified to permit the buying and selling of different assets over the 10 year period as long as the money is reinvested in a qualified OZ investment within 12 months.
Although the second round has made it clear that land without buildings on the property must be used in a qualifying trade or business, it does not specify the amount of the land on which the trade or business is conducted. Therefore, the potential exists to operate a relatively minor commercial enterprise on property that may gain significant value.
“Substantial improvements” to the property
Under the initial guidelines, the purchase of an existing OZ building required substantial improvements to be made, which meant the OF must invest more than the purchase price for improvements within 30 months. Now, the IRS has indicated that abandoned property that has sat vacant or unused for five years is not subject to this rule.
Real estate activities
The new guidelines make clear that a real estate business, including leasing of real property, can be an eligible trade or business. However, those businesses who own or operate pursuant to a triple net lease may not qualify.
The second round guidelines specifically establish the eligibility of real estate investment trust shareholders who have held their shares for the qualifying 10 year period to receive the capital gains dividend tax exclusion.
If you have been sitting on the sidelines waiting for clarification on Opportunity Fund investing, now may be the time to act. Primior can explain how this is a true win-win opportunity for the discerning investor.