After almost two years of ambiguity, the Trump administration this week released final rules governing opportunity zones, a move that experts say will lead to increased interest and investment in the program.
“Treasury has cleared up a number of areas. ” said Michael Novogradac, managing partner in the San Francisco office of Novogradac & Company LLP and an original proponent of the zones. “We now have guidance that taxpayers can rely on that will lead to a lot more investment. We’re pleased with the overall result, and expect there to be more investment dollars available.”
The opportunity zone program took effect in 2018 but has gone through multiple revisions as numerous issues were raised regarding eligibility and types of investments allowed. The United States Department of the Treasury just released its final, 544-page report.
One big change: The period for investing gains from the sale of business assets, including most business real estate, now begins on the sale date; previously, it was the end of the year in which assets were sold. To get the full 15% gain exclusion, the investment must be made by Dec. 31, 2019, and held for a period of at least ten years to avoid tax on gain realized from the investment in the OZ fund. The deferred gain invested in the OZ fund must generally be recognized by Dec. 31, 2026, less the 15% or 10% gain exclusions, as applicable.
“The timing issue was very important,” said David Blum, deputy chair of Akerman LP’s tax practice group. “Before, it made no sense.”
A survey from Novogradac showed that as the end of the year approaches, funds formed to invest in opportunity zones reported having raised nearly $4.5 billion — about 40% higher than its last report about 50 days ago.
“In terms of investment focus, residential real estate continues to lead the way, and nearly 50 percent of capital raised is in funds with a national geographic focus,” Novogradac said.
That remains the case in Miami-Dade. Prominent local opportunity zone projects include The Solé Mia Shoreline mixed-use residential and commercial project in North Miami, and the 18-story Soleste Grand Central in Overtown.
Among Treasury’s other final rulings:
- Only eligible capital gains taxable in the United States may be invested in a qualified opportunity zone fund.
- Non-resident foreign individuals and foreign corporations may make opportunity zone investments with capital gains that are “effectively connected” to a U.S. trade or business.
- The entire amount of capital gains from sale of investments can be invested in a qualified fund, as opposed to only amounts greater than losses from those sales.
The department also clarified what types of developments can receive investment from a fund — namely, new construction. Previously it was not clear if that category strictly qualified. And now, if a developer purchased an existing building in an opportunity zone for $1 million, the firm no longer has to invest another $1 million to renovate the building.
“The thought was before you had to put all investment in improving an existing structure,” Novogradac said. “Now, you can put that money towards building an adjacent, ground up development. The idea is that a rising tide lifts all boats.”
Experts predict investment activity will pick up in the county’s opportunity zones.
“The new regulations are extremely positive and flexible in allowing developers to raise money,” said Ronnie Fieldstone, partner at Saul Ewing Arnstein & Lehr LLP. “Before you had very strict time constraints. As an investor, it gives me more time on where I should invest.”
Source: Miami Herald