The U.S. Department of the Treasury recently issued its second set of proposed regulations related to the new opportunity zone tax incentive program.
The proposed regulations, issued on April 17, 2019, provide some much-needed guidance and help to clarify the requirements that opportunity zone investors must satisfy to defer paying tax on capital gains invested in a qualified opportunity fund (QOF).
As published in a prior PKF Texas article, the opportunity zone program was created by the 2017 Tax Cuts and Jobs Act. Since then, more than 100 communities throughout Harris County, including downtown Houston and much of the area east of downtown, have been designated as opportunity zones by the Treasury Department as part of the new program to encourage private investment and development in certain distressed, low-income areas across the United States in exchange for significant federal tax benefits.
The proposed regulations aim to help investors, fund managers, developers, and sponsors to do business in this area with more confidence and to take advantage of the tax incentives offered by the opportunity zone program, according to the Treasury Department.
“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,” said Treasury Secretary Steven T. Mnuchin in a press release dated April 17, 2019. “This incentive will foster economic revitalization, create jobs, and spur economic growth that will move these communities forward and create a brighter future.”
The proposed regulations address certain issues left unanswered by the first set of proposed regulations released by the Treasury Department Oct. 19, 2018. These issues include:
- Identifying transactions that could cause the deferred gain to be taxed immediately
- Specifying how much deferred gain could be immediately taxed and when
- Outlining how to treat leased property used by a qualified opportunity zone business; defining what constitutes qualified opportunity zone propert
- Clarifying the definition of “substantially all” for purposes of holding period and property use requirements
- Outlining how to source an opportunity zone business’s gross income, among other things
The first set of proposed regulations described and clarified the types of gains that investors in a QOF could defer, the time by which the gain must be invested in a QOF, and the procedures for electing to defer specified gains. They also provided rules on QOF self-certification and valuation of QOF assets.
Under the opportunity zone program, investors can obtain three types of federal tax benefits by investing in a QOF.
First, investors who realize capital gain from the sale of property to an unrelated party can defer paying tax on such capital gain until the earlier of (i) the investor’s disposition of its investment in the QOF, or (ii) Dec, 31, 2026. Investors must reinvest the realized capital gain into a QOF within 180 days of the sale, which must occur by Dec, 31, 2026.
Second, investors can eliminate up to 15 percent of capital gains reinvested in a QOF depending on the investor’s holding period in the fund.
And third, investors may increase the basis of their interest in a QOF to fair market value on the date of sale if they hold their interest in the fund for at least 10 years. As a result, investors would recognize no gain on the sale and, thus, would owe no tax on the sale of their interest in the QOF.
For a map of the opportunity zones in Harris County and the surrounding areas, click here.
This article was originally published on the Houston Business Journal website.