The second regulations were released on April 17, 2019 and provided many clarifications investors were seeking to feel comfortable moving forward with investments in Qualified Opportunity Funds. The 169-page proposal provides guidance on the “substantially all” requirements and for the holding period and use of the tangible business property. It also addresses calculations for gain inclusion transactions, treatment of leased property, use of qualified zone property and sourcing of income. In addition, it gives direction on reasonable periods for Qualified Opportunity Fund investments. The most important takeaways for me were those that will affect the types of investments that will be made. Those include the treatment of businesses in Qualified Opportunity Zones and how vacant properties and raw land are handled.
Under the new set of regulations, a business funded by a Qualified Opportunity Fund and located in an Opportunity Zone, could qualify for the tax incentives if it meets one of three “safe harbors”: at least 50% of the hours the employees or contractors work are spent within the opportunity zone, half of the company’s services are within the area or if the management and operations are based in the designated zones. Businesses taking advantage of the Opportunity Zone program have to be active, which disqualifies triple-net-leased properties. The regulations clearly state that “merely entering into a triple-net lease with respect to real property owned by a taxpayer is not the active conduct of a trade or business.”
Another important clarification was made regarding the substantial improvement provision and it’s relation to vacant property. The newly issued proposed regulations provide that the “original use” of tangible property begins when any person first places the property in service for purposes of depreciation, or if they could have depreciated the property had they been the owner for tax purposes. This means that if the acquired property is vacant at the time of purchase, it will satisfy the original use requirement, meaning the substantial improvement provision will not need to be met. The regulations state that if raw land is purchased, and even though the land cannot possibly satisfy the original use test, that land does not need to be substantially improved.
To download the full copy of the second proposed regulations click here https://chicagoopportunityzones.com/wp-content/uploads/2019/04/Second-Proposed-Regulations-4-17-19.pdf. The following articles are also good resources for summaries of the new proposed regulations.
“Refreshed regulations may give opportunity zones new life” article AEI.org.
“IRS releases last round of opportunity zone regulations” article on Forbes.
“Second set of proposed opportunity zones regulations” article on Bloomberg.
The total number of census tracts certified as Opportunity Zones by the U.S. Treasury.
Potential unrealized capital gains eligible for Qualified Opportunity Fund investment and tax treatment.
Treasury Secretary Steven Mnuchin’s estimate of private capital that will flow into Opportunity Zones.