IRS Delivers Clarity on Opportunity Zone Investment

Posted on April 29, 2019

Proposed regulations rolled out last week by the Treasury Department should make it easier for commercial real estate practitioners to invest in qualified Opportunity Zones (OZ).

An “Opportunity Zone” is defined as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” They were created as part of the 2017 Tax Cuts and Jobs Act, which NAIOP supported.

Investors can reduce their taxes by taking capital gains income and putting it in a Qualified Opportunity Fund that invests in designated Opportunity Zones. Under the latest IRS regulations, the funds now have 12 months instead of six to put their money to work in an OZ.

The IRS also clarified that:

  • At least 70% of the property the funds invest in must be located in a qualified OZ, although the rest may be in an adjacent area.
  • While the property is held, tangible property must be qualified OZ business property for at least 90% of the holding period.
  • The partnership or corporation that makes the investment must be a qualified OZ business for at least 90% of the holding period.

The new provision allows individuals to defer tax on their capital gains if those funds are invested in an OZ, while also receiving up to a 15% reduction in the total amount owed if the investment is held for 7 years. If held for 10 or more years, in addition to the 15% cut, any subsequent gains realized from the sale of the investment (typically in a property or business) are exempt from capital gains tax altogether.

However, the regulations make clear that the preferential tax treatment does not apply to carried interest earned for services, a common form of income in the CRE industry. Investors may be subject to tax if they transfer their Opportunity Zone interests, but not if they die and leave the interests to heirs.

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