Opportunity Zones Create Opportunity For All

Since their establishment earlier this year, investors have seen great potential in the tax code’s new Opportunity Zones. But with the exact rules hazy, many waited before taking action. Now that the Treasury Department has set forth new regulations, the benefits are clearer and include good news for real estate investors.

To enjoy the benefits of a qualified opportunity fund, property owners must improve their properties by 101 percent of the basis. The Treasury has now clarified that in cases where the property includes land, the purchase price allocated to land will not be counted in when calculating the 101 percent.

“Otherwise, people can claim their properties are 99 percent land, one percent building,” said Rob Gilman, a partner and Co-Leader of the Real Estate Group at the accounting firm of Anchin, Block & Anchin LLP.

“They’ll need a third-party appraisal to show how they determined what the land portion is. Otherwise, they could come up with crazy values, saying it’s all land. You could make a case that the buildings in some of these areas are dilapidated anyway, so there should be a bigger allocation to land. But people can’t come up with these numbers just to decrease how much money they have to spend.”

The Treasury Department has established that investments in one qualified investment Opportunity Zone can be rolled into another without penalty, and that any entity that qualifies as a partnership for federal income tax purposes can be used to form a qualified opportunity fund.

The Department also noted that partners in a partnership can defer gains from the partnership for 180 days from the year-end of the partnership, and that debt investments will not be an eligible investment.

They also further established procedures for the 90 percent rule, which states that in order to be considered an opportunity fund, 90 percent of assets must be held on the qualified Opportunity Zone property. Some were concerned about how cash related to property improvements would be considered, but the Treasury declared that if you have a plan in writing to improve the property, you can exclude the cash from the 90 percent consideration.

There was also a concern that short-term capital gains, if invested in these funds, would convert to long term. Jeffrey Bowden, a tax principal at Anchin, explained that this is not the case.

“People questioned if short-term gains were invested in these properties would they become long term, because they have to hold it for seven years until they pay the deferred tax,” Bowden said. “The new regulations clarify that all the gains retain their attributes. So short-term gains will remain short term.”

From the announcement of Opportunity Zones until now, investors have been enthusiastic but cautious, as they lacked the information to determine how beneficial these might be in the long run. Now, with many regulations finally made public, Gilman believes the flood gates will open for what is now clearly a solid opportunity for investors.

“I think now, you’re going to start seeing some deals,” said Gilman. “Now that we know what’s involved, you’re going to start seeing activity on these funds.”