A Comprehensive Guide To The Opportunity Zones' Proposed Rules

Ryan McCormick and Jeffrey DeBoer

On October 19, Treasury and the IRS released highly anticipated regulatory guidance related to the Opportunity Zone program. GlobeSt.com asked Real Estate Roundtable President and CEO Jeffrey DeBoer and Roundtable Senior Vice President and Counsel Ryan McCormick to explain the proposed rules and their implications for the real estate industry.

What is your main takeaway from the new Treasury regulations on Opportunity Zones?

DeBoer: The Treasury guidance is a clear indication the Administration is fully committed to an Opportunity Zone program that spurs broad-based job creation and creates new economic opportunity for businesses, entrepreneurs, and residents in low-income communities. The regulations help to implement the objectives of the lawmakers who designed the program, such as Senator Tim Scott (R-SC). With the regulatory regime now taking shape, we foresee Opportunity Fund investors actively partnering with local leaders and entrepreneurs on projects that both drive economic activity and respond to the needs of communities.

 What do the proposed regulations mean for real estate?

DeBoer: For real estate, the proposed regulations are unquestionably positive. They clarify key technical questions and open issues, and they should allow investments in funds and in underlying projects to go forward. While some important questions remain, we continue to believe that the Opportunity Zone program will be a powerful catalyst for transformational real estate investment in these designated low-income areas.

Jeffrey DeBoer

There has been some uncertainty regarding the type of gain that can be deferred and invested in an Opportunity Fund and who is eligible to make such an investment. Do the regulations put those questions to rest?

DeBoer: The proposed regulations take the view that only capital gain can be rolled into an Opportunity Fund and qualify for the new tax benefits. Ordinary gain, such as income subject to depreciation recapture, income from the sale of inventory, and income from the sale of intangible assets created by the taxpayer, would not be eligible, even if it arises from the sale of a business or parcel of real estate. That may be unduly restrictive, given the legislative language and underlying intent. Since only money from “gains” can be invested in qualifying Opportunity Funds, that definition should be broad, not narrow, to make the incentive as efficient as possible. On the positive side, capital gains will include short-term capital gain otherwise ineligible for a reduced rate. Presumably, the rule also encompasses REIT capital gain dividends. The gain cannot arise from a related party transaction. This is a sensible rule to ensure that only bona fide gain qualifies for the tax benefits.