The Treasury Department released a second set of guidelines for Opportunity Zones that should clear up unanswered questions. There’s been a lot of interest in the tax break program, but many investors have been sitting on the sidelines waiting for details. Tax experts are still pouring through the new 169-page document, but according to some media reports, investors are getting much of what they wanted on their wish list. (1)
As many of our members know, we’ve been very enthused about this program. It allows you to sell an asset, use the capital gains for an Opportunity Zone project, and reduce the amount of tax owed on those gains. You can also completely eliminate taxes on the new investment if you remain invested for at least 10 years. That’s an enticing deal for anyone who’s worried about a big capital gains tax bill from the sale of an asset. But like many investors, we’ve been waiting to hear from the Treasury Department on exactly how the incentives will work.
Bloomberg has a few insights from an early analysis of the document. (2) The new rules give investors more flexibility. They allow up to six months to buy assets within a fund. Eligible assets can also include land and vacant buildings. And, funds will be able to hold more than one asset to reduce the risk of loss from one bad project. Investors will also be allowed to sell assets within a fund, with up to 12 months to reinvest in another eligible project. John Lore ,of the Capital Fund Law Group, explained in the Bloomberg article, the new rules “allow funds to have a rolling investment strategy without holding that specific property for 10 years, which for many investors, is not an ideal strategy.”
Another big clarification involves a requirement that businesses operating as an Opportunity Zone asset must get half their gross income from within that zone. The new rules provide three options for satisfying a requirement for business activity. Bloomberg says, the proof can be “based on employee hours, where services are performed, or where management is located.”
The Treasury Department released the first set of guidelines in October. This second set of guidelines is designed to answer a lot of investor questions, and give investors more leeway in their investment strategies.
Treasury Secretary, Steven Mnuchin, said in a statement, “We are pleased to issue guidance that provides greater flexibility for communities and investors as we continue to encourage investment and development in Opportunity Zones.” He says, “This incentive will foster economic revitalization, create jobs and spur economic growth that will move these communities forward and create a brighter future.
U.S. Senator Tim Scott was the one who inserted the Opportunity Zone program into the 2017 tax reform package. (3) He said of the latest set of guidelines, “Overall, the Treasury Department took some good steps forward today with the issuance of the second round of regulations governing Opportunity Zones.” He also welcomed the beginning of a public comment period on the best use of Opportunity Zone tax incentives.
HUD Asks for Public Comment
The Department of Housing and Urban Development is estimating that investors will pour $100 billion into this program. As I mentioned, many investors have wanted more information about how it will work. Bloomberg cited research by a database for Opportunity Zones called Opportunity DB. That database shows 88 funds that have raised more than $26 billion as of April first. That’s far from the $100 billion mark, but these new guidelines are expected to get investors off the sidelines.
If you’d like to know more about how this all works, and what the Treasury Department included in its latest set of rules, please check out our webinars