May 2, 2019
By Amy Sorter
On Wednesday, April 17, the U.S. Department of the Treasury issued its second round of guidance for the Opportunity Zones program. The latest information helped clarify some issues connected with this tax-incentive program, which had been passed as part of the Tax Cuts and Jobs Act of 2017. The guidance cleaned up questionable topics, ranging from leases, to Qualified Opportunity Zone Businesses (QOZB), to better treatment of land which was, according to Greenberg Glusker’s Schuyler Moore: “a huge issue.”
The experts agreed that one important clarified issue focused on a Qualified Opportunity Fund’s asset sale. “Now, if the QOF sells an asset, a partner can elect to exclude any gain flowing from a partnership or S-Corp to their K-1, so long as interest in the fund has been held for at least 10 years,” said Marc Wieder with Anchin Accountants & Advisors. Prior to the guidance clarification, he noted, partners had to actually sell their QOF interest for that exclusion. “Now, if a fund with multiple assets sells one, it won’t automatically trigger a gain for fund holders,” he said.
Another important issue involved tax benefits for refinancing proceeds and secondary market purchase. Cadre’s Dan Rosenbloom said that, distribution of refinancing proceeds doesn’t trigger deferred gain recognition, nor does it preclude investors from eliminating capital gains tax, predicated on a 10-year hold. “Given the frequency of refinancing in real estate deals, and the potential need to use those proceeds to satisfy the deferred tax liability,” Rosenbloom said, “this was welcome guidance.”
Also clarified was the role of leased properties in QOZs. Specifically, properties leased to QOFs or sub-funds qualify if they are leased from a related party or already improved and used in the Opportunity Zone.
Then there is the question of land, and how it fits into the QOZ program. Moore noted that minimally improved land can be considered a QOZ property, but only if the QOF or its sub-fund is intending to improve that land by more than an insubstantial amount within 30 months after acquisition. Furthermore, “it doesn’t appear that improvements must be completed by that time,” he said.
Furthermore, the status of vacant buildings as original use would be accepted, as long as that property is empty for at least five years. Wieder acknowledged that five years is a somewhat of a long time to carry vacant property, but he noted that the vacancy guidance could lead to improvements on properties that have been sitting empty for many years. “The whole idea is to improve those areas,” Wieder said.
The general consensus among the experts was that the new guidance would provide more clarification among QOF investors. “This has improved matters, and I think we’re getting closer where we need to be,” Wieder said. While the U.S. Treasury and IRS are currently soliciting comments from interested parties in preparation for another round of guidance in summer 2018, “the new proposed regulations offer an additional layer of comfort and transparency for potential investors,” Rosenbloom observed. “This is crucial for attracting more investors, of all levels, into the space.”
Pictured (L-R): Rosenbloom, Moore, Wieder
For comments, questions or concerns, please contact Amy Sorter