Last Friday, Treasury Department officials released the first round of proposed regulations on the new Opportunity Zone program included in the 2017 Tax Cuts and Jobs Act (“TCJA”) (Regulations). Opportunity Zones are economically distressed communities across the country where median family income is at least 37% below the area/state median and unemployment is at least 1.6 times higher than the national average. The purpose of the program is to generate investment in these Opportunity Zones by encouraging investors to re-invest their capital gains into these areas in exchange for specified tax benefits. Click here to see my prior client alert on the program for more detail.
The code section included in the TCJA addressing Opportunity Zone Funds left many issues to be addressed by future regulations. The initial round of regulations issued last Friday clarified several, but not all, outstanding issues with Opportunity Zone investments. In addition, the Treasury Department issued Revenue Ruling 2018-29 (click here to be redirected to the revenue ruling) addressing the substantial improvement requirement of the program. The proposed regulations addressed several issues, including clarify the following:
- Clarify that only gain treated as capital gain is eligible for deferral;
- Allow taxpayers to defer gains that have been allocated to them through partnerships and other pass-through entities;
- Provide taxpayers with gain from pass-through entities 180 days from the end of the pass-through entity’s tax year to make opportunity fund investments;
- For opportunity zone investments held for 10 years or more, allow taxpayers to avoid tax on appreciation of such investments until December 31, 2047, if the investments are sold or exchanged prior to that date;
- Provide Opportunity Zone Funds a “safe harbor” to hold capital for up to 31 months under certain circumstances without violating nonqualified financial property limitations; and
- Clarified that Opportunity Zone Businesses are able hold up to 30 percent of their tangible property outside opportunity zones or in otherwise nonqualifying assets.
The regulations request comment on certain issues that are not addressed in the initial regulations, and the Treasury Department intends to release a second round of proposed regulations prior to the end of the year. Our firm will continue to monitor the implications of these proposed regulations and future regulations. Meanwhile, if you have any questions on the program or the new regulations, please contact Bradley Wooldridge at 919-510-9253 or your Manning Fulton relationship attorney.