WASHINGTON, DC–On Friday the US Treasury released long-awaited proposed rules that answered some of the pending questions investors had about the Opportunity Zones established under last year’s tax overhaul.
Namely some of the pending questions around the rule how quickly must an Opportunity Fund deploy new capital and when has an existing real estate asset qualified as an eligible investment?
What the Treasury Department put forth on Friday is positive, The Real Estate Roundtable CEO Jeff DeBoer tells GlobeSt.com.
“They clarify many key questions that should allow real estate transactions and investment to go forward,” he says. “We strongly believe that the Opportunity Zone program will be a powerful catalyst for transformational real estate investment in lower income communities across the country.”
Among the answers provided, the Treasury Department said that a business can qualify as being in an Opportunity Zone as long as 70% of its property is in the designated area.
Another important data point: Investors have 180 days from the sale of their stock or business to put the proceeds in an opportunity fund.
Businesses also get 30 months to hold working capital for an investment in the Opportunity Zone, just so long as there is specific plan for a project.
Even without some of these key details interest in Opportunity Zones has been high for their potential benefits.
In short, the law that was unveiled in January allowed for capital gains from prior investments — proceeds from the sale of real estate, stocks, securities, etc. — to be rolled into an Opportunity Fund and the tax that would otherwise be owed on the gain from the prior investment would be deferred until the end of 2026. It also stated that the capital gains tax on this deferred gain would be reduced by 10% if the investment were to be held for five years or 15% if the investment was held for seven years. Finally, capital gain generated from the investments made by the Opportunity Fund would be exempt from capital gains tax altogether if the investment in the Opportunity Fund is held for at least 10 years.
Even without the final details a number of firms and developers have moved to set up funds targeting Opportunity Zones. There was some pressure this year to move quickly because the gain that is rolled into an Opportunity Fund is only deferred until the end of 2026–meaning the equity investment must be made by the end of 2019 in order to get the full 15% tax basis step-up that comes from investing in an Opportunity Fund for seven years.
With the final details released, it can be expected that even more funds will follow suit.