IRS Releases New Round of Regs for Opportunity Zone Funds

The Treasury Department has released a new round of proposed regulations governing opportunity zone funds that answers several key questions that have kept potential investors and fund operators on the sidelines.

The latest proposed rules, for example, clarify the requirement that 50% of the gross income of a business must come from an opportunity zone in order to qualify for the intended tax benefits. Would a company operating in the zone but collecting most of its revenue from outside the zone qualify/?

The IRS, a bureau of the Treasury, says it would qualify if at least half of the company’s employee hours or wages are sourced in the zone. The location of its customers won’t be relevant.

Another question that was unresolved before Wednesday had to do with the holding period of fund assets to qualify for the maximum tax benefit available after 10 years. Could a fund sell assets in one opportunity fund and deploy them in another without losing the maximum  benefit?

Yes, according to the IRS. The tax benefit is tied to the investor’s time in opportunity funds, not the fund’s longevity, provided the investor doesn’t take a distribution.

Opportunity zone funds allow Investors to defer capital gains so long as they are rolled over to a fund within 180 days and to receive a stepped up basis for tax purposes if the investment is held for at least five years. At 10 years, the basis is stepped up to the market price.

The zones in which the funds invest are either in or adjacent to depressed communities, and there are over 8,700 spread throughout the U.S. To date, most of the early opportunity zone funds are focused on real estate developments, but the tax benefit is also available for other types of businesses opportunity in the zone.

John Lettieri, president of the Economic Innovation Group, which is credited with conceiving the idea  behind opportunity zones, says the latest proposed regs are “a positive step that removes most of the obvious impediments that has kept capital on the sidelines.”

In a call with reporters, Lettieri said the latest regs will rapidly unlock capital that’s been in a holding pattern and  will make it easier for communities to organize” for hosting that capital. “2019 is the build-it year for the marketplace,” said Lettieri.

He added that he expects Wednesday’s notice from the IRS, which runs 169 pages, will be “the most substantial release we’ll see throughout the lifetime of opportunity zones” though he hopes to see more especially on data transparency and reporting requirements. The notice contains proposed rules that are subject to public comment for 60 days after publication in the Federal Register. A public hearing on the proposed regulations is scheduled for July 9 at 10 a.m.

— Check out An Opportunity Zone Fund Checklist for Advisors on ThinkAdvisor.