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Opportunity Zone Investors Will Benefit From Learning These IRS Regulations

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According Bisnow.com. After two years, the final regulations about the opportunity zone program has just been released to the public. The document is 544 pages long and adds a number of new details. The Secretary of Treasury said that the new regulations will provide clarity and certainty and will cause more money to flow unto opportunity zones.

Some of the issues addressed:

  • Rules around aggregation of developments on one property, to meet the substantial improvement requirement.
  • What happens to investments pulled out of opportunity zone funds before the ten-year holding period is done?
  • Qualified Opportunity Zone businesses (QOB)
  • The 5% maximum investment in “sin businesses” that would otherwise be disqualified from the tax break.
  • IRS and Treasury allowed for QOF to be structured like most funds that invest in multiple businesses or properties. It removed language in the previous regulations that required all of the QOF to be sold at once to qualify for the maximum capital gains tax discount
  • Now QOF can sell individual properties. It is no longer required to sell the entire QOF, including the LLCs, a QOF creates to hold the properties.
  • Now QOFs can hold multiple property LLCs and various assets within them, and it can exit those assets without taxable events or losing OZ benefits.
  • The final regulations allow the improvement threshold to apply to properties in aggregate – additional buildings and developments can be considered to add value to the lot itself.
  • Now you can add a new multifamily building to a property that contains a multifamily building, and write it off as a substantial improvement.

 

  

The question of QOBs remains under-explained.   In the raw, the law states that any capital gains realized from QOBs after a holding period of ten-years are exempt from taxes. Uncertainty has capped investment in QOFs at under $5 billion.

Experts report that the new regulations will open the floodgates for enormous investment.  People will spend some time to digest the new rules, but it will result in a positive inflow into OZ.

The late date of the publication will not lead to increased investments before December 31st, 2019, the deadline for the 15% maximum discount after a ten-year hold.

 

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One issue relates to Form 8996, which requires disclosure of all of the investments of the QOF, the census tract in which the assets are located, and the value of the assets as measured at certain times of the year. When an investor sells, Form 8996 requires disclosure of his name, the value of the investment, and the percentage of the fund that the investment represented.

IRS cannot require information in respect of the impact of the investment, such as:

  • Number of jobs created
  • Change of income levels
  • Change of Demographics
  • Indications of gentrification

 

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The original sponsors of the bill introduced legislation in November to require the reporting of the same, but some members of Congress apparently introduced bills that go a lot deeper and further. It would disqualify some zones on the grounds of so-called affluence, while some zones targeted are allegedly linked to friends and family members of key figures on the program. No proof of these allegations was provided.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intended for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

Contact us for more info about tax strategies for Real Estate Investments. 

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