IRS Releases Proposed Rule on Opportunity Zones, Signals Additional Guidance Coming in the Near Future
The Internal Revenue Service (IRS) has published its proposed regulations and an accompanying revenue ruling on the Opportunity Zones tax incentive that was enacted in the Tax Cuts and Jobs Act of 2017. There will be a 60-day public comment period and a public hearing has been scheduled for January 10, 2019 in Washington, DC.
These proposed regulations offer investors and fund managers clarity and guidance for structuring Opportunity Funds, including:
Eligible Entities and Gains
- Taxpayers eligible to defer capital gains include individuals, corporations, partnerships and other pass-through entities.
- Investors may only invest capital gains into a qualified Opportunity Fund. Other investments are not eligible for the tax benefits.
- Investors can set up multiple Opportunity Funds from a single capital gain, as long as the gain is not counted twice. Investors can also sell an asset in the Opportunity Fund and reinvest their gains into the Fund.
- Opportunity Funds must invest 90 percent of their funds in qualifying assets, such as qualified stock, partnerships or business. This is known as the “90 percent test.”
- The Opportunity Zone statute requires that an investment in tangible property, such as real estate, “substantially improve” the property. The regulations clarify that land will not be included in determining the properties’ value for the “substantial improvement” test. The IRS is also soliciting comments on additional rules that might be needed regarding the “substantial improvement” test for tangible property.
- Qualified Opportunity Zone Businesses must have 70 percent of tangible property owned or leased within the Opportunity Zone.
- Investors generally have 180 days to invest in an Opportunity Fund after realizing a capital gain.
- Opportunity Funds engaged in building or rehabilitating a property can keep working capital in the fund for a 31-month period. The Opportunity Fund must draft and maintain a plan for construction or rehabilitation to ensure that by the end of that period, 90 percent of the Fund's assets are deployed in Opportunity Zones.
- Qualified investments in Opportunity Funds will be eligible for the tax exemption until December 31, 2047.
See Novogradac & Co. for more information about specific guidance included in the proposed rule.
It’s important to note that these regulations are proposed, not final. Changes are possible based on public input during this 60-day comment period. The Treasury Department and the IRS are simultaneously working on additional guidance, including a second round of proposed regulations. The October 19 proposed regulations note that it’s expected that guidance will be delivered in the “near future” and will address:
- a further defined meaning of “substantially all” in the various places the phrase occurs in the statute;
- the transactions that may trigger the inclusion of gain;
- the definition of the “reasonable period” an Opportunity Fund has to reinvest proceeds from a sale;
- rules if an Opportunity Fund fails to maintain the required 90 percent investment standard; and
- information-reporting requirements.
We also anticipate a comment period on accompanying documents, including the new Opportunity Fund tax filing form (draft form 8996).
Enterprise encourages the submission of comments to identify ways to improve the regulations. Enterprise believes that regulations should incorporate transparency of Opportunity Fund activities and accountability to prevent abuse. For example, collecting transaction-level data from Opportunity Funds will enable the public and Congress to evaluate the efficacy of the Opportunity Zones tax incentive.
We have seen strong and sustained bipartisan support for the reporting requirements laid out in the conference report that accompanied the Tax Cuts and Jobs Act and that were originally included in the Investing in Opportunity Act. Understanding the impact of Opportunity Fund investments was envisioned as a cornerstone of the Opportunity Zones policy design. Enterprise has been advocating for regulations that promote transparency, prevent abuse, and ensure inclusive and equitable economic growth and strongly encourages the IRS to address this need in the forthcoming guidance.