The first set of proposed regulations (published in October 2018) clarified many points that are important for QOFs which own real estate located in Qualified Opportunity Zones (QOZs). However, taxpayers hoping to invest in QOFs which conduct other types of business in QOZs were left scratching their heads on several crucial questions. Fortunately, the second set of proposed regulations (published on April 2019) answered many of these questions.
This past April, the U.S. Treasury released a second set of proposed regulations relating to the qualified opportunity zone program. These proposed regulations address a wide range of issues affecting owners of real property located in “qualified opportunity zones” who want to develop their property using capital furnished by qualified opportunity zone program investors.
Opportunity zones are tax-incentivized census tracts in certain low income communities designated by the state and federal government to encourage long-term investment.
The Securities and Exchange Commission and the North American Securities Administrators Association (NASAA) have issued a summary that explains the application of the federal and state securities laws to opportunity zone investments.
Opportunity Zones have inspired hope for many, but also a growing fear. The hope is that the tax break will spur investment in distressed communities where real wages are falling and rents are rising, where small businesses are closing and inequality is widening. The fear, for proponents and critics alike, is that greedy speculators will run up the tab for taxpayers while harming current residents.
Thanks to these new guidelines, Opportunity Zone Funds can now incorporate multiple properties into a single investment vehicle, provided they meet the designation criteria. This allows for a diversified portfolio with a single investment, meaning your overall investment benefits from spreading the risk across multiple properties. So, even if one property underperforms, the more successful deals can level things out.
Opportunity zones are designated census tracts that house low-income communities. Within these designated zones, investors of all kinds essentially get a tax break if they invest in the community with real estate or a business. Governors were able to nominate 25% of their low-income census tracts for the designation. The first opportunity zones, according to the IRS, were designated in April of last year.
Opportunity Zones have been hailed as a boon for the poor, and lambasted as a boondoggle for the rich, but how would anyone know for sure? Thanks to a snafu in Congress, there are no requirements that people participating in the potentially lucrative economic development program detail what they are doing, where they are doing it and why they are doing it.
There’s no question that the new Opportunity Zone program is generating enthusiasm in most economic development quarters, along with a measure of trepidation in others. But no one knows how to prove success or failure from Opportunity Zones, which were created by the 2017 tax overhaul, H.R. 1 (115), to boost economic development in struggling areas.
The New Proposed Regulations provide more flexibility in the way taxpayers can qualify for the benefits of the Opportunity Zone tax incentive program. With limited exceptions, taxpayers are permitted to rely on the New Proposed Regulations before they are finalized. These largely favorable regulations enhance scalability and are likely to lead to increased investment in Qualified Opportunity Zones.