On April 17, 2019, the Internal Revenue Service (IRS) issued a second tranche of guidance providing details about investment in Qualified Opportunity Zones. Through the Opportunity Zone Program, an investor is able to receive significant tax benefits that include 1) a tax deferral for capital gains invested in a qualified opportunity fund; 2) forgiveness of up to 15% of the tax on the invested capital gain in the qualified opportunity fund, where the investment is held for seven years; and 3) potential step-up in basis to fair market value and elimination of capital gains tax when disposing of a qualified opportunity fund investment, if the investment is held for 10 years or more. The program is expected to infuse long-term capital through various investment vehicles into low-income communities, designed to promote economic growth.
The proposed regulations provide clarification on several issues still unanswered by the first tranche of regulations, including the following:
- The regulations provide guidance on (i) the calculation of gross income, (ii) the ability of businesses to use leased property, (iii) expanding the reasonable working capital safe harbor to include development of a trade or business, and (iv) calculation of asset values for purposes of asset tests.
- “Substantially all” is defined as at least 70%, unless it is related to the required holding period of Qualified Opportunity Zone Business Property, in which case, “substantially all” is defined as 90%.
- The Substantial Improvement Test is done on an asset-by-asset basis.
- Original Use Test is done if a property has been vacant for at least five years prior to its acquisition; it does not need to have substantial improvements to pass the original use test.
- Unimproved land does not need to be improved but must be used in a trade or business as opposed to held for investment.
- Sponsors cannot utilize Opportunity Zone benefits for services; investments must be for cash or property only.
- Capital must be invested in Opportunity Zone Property or Opportunity Zone Businesses within six months of the capital gains being invested in an Opportunity Fund.
- For an Opportunity Zone Business, there must be a written description for the planned use of the funds when the investment is made.
- If a property is leased with a triple net lease, it will not qualify as Opportunity Zone Property.
- The regulations implement a one-year reinvestment requirement if an Opportunity Zone Property or Business is sold.
TECHNICAL INFORMATION CONTACTS:
Sharon Welhouse
Principal
Ryan
512.698.3538
sharon.welhouse@ryan.com
Myriam Simmons
Director
Ryan
469.399.4290
myriam.simmons@ryan.com
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.