Today, the U.S. Department of the Treasury published long-awaited regulations on the Opportunity Zones tax incentive program. The Opportunity Zones program aims to promote investment and drive economic growth in low-income or economically disadvantaged communities. The current list of approved Opportunity Zones in Nebraska can be found here, and in Colorado here.
The program is an investor incentive that pertains exclusively to capital gains. If an investor sells an appreciated asset, the investor may reinvest the gains with an investment fund, known as a Qualified Opportunity Fund (“QOF”). In turn, the QOF invests in stock, partnership interests and tangible property of businesses located within an Opportunity Zone. The QOF must substantially improve any property owned by a business it invests in.
The program allows investors with capital gains tax liabilities to receive favorable tax treatment such as (1) temporary deferral, (2) step-up in basis, and (3) avoidance of additional capital gains taxes. The longer the investment in the QOF is held, the greater the capital gains tax relief for investors. More specifically, investors can defer tax on any prior gains until the date on which an investment is sold or exchanged, or December 31, 2026, whichever is earliest. If the investment is held for five or seven years, the investor receives a step-up in basis of 10% or 15% of the deferred capital gains, respectively. In addition, if the investor holds the investment for at least ten years, the investor would be eligible for an increase in basis equal to the fair market value of the investment on the date that the investment is sold or exchanged. A taxpayer must generally invest in a QOF within 180 days from the date of the sale or exchange giving rise to the gain.
As previously mentioned, the Treasury Department finally released proposed regulations to provide additional guidance regarding the Opportunity Zones tax incentive. The guidance issued thus far clarifies what gains qualify for deferral, who can invest in Opportunity Zones, and parameters for establishing a Qualified Opportunity Fund. According to the U.S. Department of the Treasury, additional guidance will be issued “in the near future,” which we hope means before the end of the year. Although this preliminary guidance is informative, without further guidance and final regulations, real estate investors and developers are left uncertain as to whether the benefit program will work as intended.
If you have any questions or want to learn more about the Opportunity Zones tax incentive, please contact one of Woods & Aitken LLP’s Real Estate Attorneys.