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On October 19, the Treasury Department released proposed rules for Qualified Opportunity Zones, a federal program created by the Tax Cuts and Jobs Act in 2017. The program incentivizes investment and development in distressed communities, designated as “Qualified Opportunity Zones” (QOZs) through tax benefits for investors. These benefits include deferral of federal capital gains tax on qualified capital gains reinvested into a QOZ (via an “Opportunity Fund”), and potential reduction in the tax ultimately paid on those gains (if held for five years they receive a step-up in basis of 10%; if held for seven, 15%). In addition, gains accrued on investments while in an Opportunity Fund and invested into a QOZ may be exempted from federal capital gains tax, if the investments are from a proper deferral election (reinvested capital gains that the tax is deferred on) and held for at least ten years.
The proposed rules provide important clarifications for interested investors, including the type of gains eligible for tax deferral (capital only), how investments into Opportunity Funds made of both capital gains proceeds and non-gains funds are treated, the overall timeline for the program, how to certify an Opportunity Fund and meet the “90% asset requirement” (that 90% of a fund’s assets be held in a QOZ), and how they will determine that an Opportunity Fund has “substantially improved” a QOZ business property. Further proposed rules are expected on other aspects of the program, and the IRS will hold a hearing on the issue on January 10, 2019.
NAR is closely monitoring this issue and will provide feedback on the proposed regulations to ensure the program is successful. This topic will be featured at the November 2018 REALTORS® Conference & Expo in Boston.