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On April 17, the Internal Revenue Service (“IRS”) issued new proposed regulations to address a number of the outstanding questions and ambiguities pertaining to the Opportunity Zone program. The hope is that the new IRS guidance will spur significant Opportunity Zone investments that have been on the sidelines waiting for additional clarity. The proposed regulations answer major questions regarding original use and substantial improvement of tangible property and vacant land, requirements for being considered a Qualified Opportunity Zone Business (“QOZB”), the treatment of leased property, income inclusion events and distributions, and how long a Qualified Opportunity Fund (“QOF”) has to deploy capital in Qualified Opportunity Zone Property to satisfy the 90 percent asset test.

There are still outstanding issues and questions, including the tax treatment of interim gains of a QOF during an investor’s holding period and QOF compliance reporting, to name a few. However, the IRS’s most recent regulation proposal should facilitate additional activity and deal flow in the Opportunity Zone space. Here are a number of key highlights from the voluminous regulation release:

Real Estate Development

  • The regulations specify that the original use and substantial improvement requirements do not apply to vacant land. Accordingly, any development of vacant property should qualify for QOF investment.
  • Additionally, structures and buildings that have been vacant for 5 years will satisfy the original use requirement and will not require substantial improvements.

Continue Reading Much-Needed Clarity Finally Arrives for Reaching the Land of OZ

Enough time has passed since the IRS issued its first substantive round of draft regulations and guidance on the federal Opportunity Zone program for certain Qualified Opportunity Fund (“QOF”) managers to begin their capital raise.  Some Funds are still working through structuring concepts and documentation, while many others remain on the sidelines in light of the outstanding questions and potential issues that remain for Opportunity Zone investments and projects.  While the remaining issues and areas of confusion should not be taken lightly, there is also a bit of a race against the clock element in play due to the December 31, 2019 deadline for an investor to invest in a QOF and receive the maximum level of tax benefits afforded under the program.
Continue Reading Start Raising Capital or Wait for Additional Guidance?

On October 19, 2018 the Internal Revenue Service (“IRS”) unveiled its long-awaited guidance on the Opportunity Zone program. The IRS released proposed regulations which have a 60-day notice and comment period before being finalized. Although the regulations may not be finalized, they can be relied on by investors and Fund managers. The IRS also released additional guidance in the form of Revenue Ruling 2018-29, which addresses the “substantial improvement” requirement as applied to real property.
Continue Reading Opportunity Zone Guidance Released with Some Answers and Some Outstanding Questions

When the Tax Cuts and Jobs Act was being negotiated and considered by Congress at the end of 2017, most practitioners, developers, and business owners were trying to assess its impacts on the mortgage interest limitation, the cap on the state and local tax deduction, 1031 exchanges, immediate expensing of business assets, and other key issues. In that flurry of negotiation and analysis, a powerful federal tax incentive was added to the law that could lead to a vast transfer of wealth while also funding the revitalization of some of the country’s most distressed areas. That new powerful tool is the Opportunity Zone program.

The basic goal of the Opportunity Zone program is to unlock unrealized capital gains being held by companies and individuals and direct that capital towards businesses and projects in certain distressed areas. This is accomplished by incentivizing prospective investors to sell appreciated property and reinvest the gains into qualified Opportunity Zone projects through offering attractive tax incentives—three tax incentives to be precise.Continue Reading Opportunity Zones: What is All the Fuss About?

Sills Cummis has learned that later today the Internal Revenue Service will be releasing the long-awaited regulations for the new federal Opportunity Zone program together with a revenue ruling and a key document, the Form 8996 for self-certification by OZ funds.  Please return to this site over the weekend and beyond for a continually-updated summary…

The federal opportunity zone program offers the potential for directing new and significant capital investment to some of the country’s areas in need of development.  When describing the program, we have referred to it as the next big thing in economic development that could usher in the greatest transfer of wealth this country has seen in decades. However, as federal regulators continue to delay in issuing any meaningful guidance, many investors, fund managers and project developers are waiting on the sidelines until some of the biggest questions and uncertainties surrounding the program get resolved. Furthermore, as more examples are fleshed out and discussed amongst practitioners, investing in a Qualified Opportunity Fund may not be the optimal investment strategy for certain taxpayers depending on the specific facts involved. This is particularly true in the case of taxpayers who own appreciated real estate; for them, 1031 like-kind exchanges may still be more attractive.
Continue Reading Opportunity Zones—Curb Your Enthusiasm (Maybe…)

Late last week, the governors of New York and Pennsylvania submitted their selections for opportunity zone designations to the U.S. Department of Treasury. Those nominations are expected to be approved by Treasury to take advantage of the new federal tax incentive program. The federal Opportunity Zone program is a new tax incentive designed to direct…