Opportunity Zone or Zones were an important but rather quiet blogging issue for us previously. Now, after enduring their first tax season, we thought we should revisit the investments and tax breaks made possible by the opportunity zones. For an introduction to opportunity zones, please feel free to read or review our previous blog entitled “Opportunity Zones, Capital Gains and Main Street, USA.”
Opportunity Zone and Hesitating Investors
When they looked at the tax breaks for investing in low-income communities, initially investors were excited by the opportunities. However many investors paused and held back. They delayed committing their investment money to the newly designated opportunity zones. So, the government hopes to remedy such hesitation.
More Clarity On Opportunity Zone or Zones
The New York Times recently announced, “A new batch of tax regulations from the Treasury Department.” Thus, the regulations “will establish the most comprehensive guidelines yet for what sorts of investments qualify for tax benefits associated with opportunity zones…”
The Tax and Jobs Act of 2017 created the zones. Likewise, the new legislation will designate the detailed procedures for taking advantage of the new tax breaks.
Big News Breaks on Easter Saturday
Kevin Hassett is the chairman of the Council of Economic Advisers. With a renewed optimism for opportunity zones, he recently made an announcement regarding the new regulations. He stated, “activity is basically going to lift off like a rocket ship.”
At Gavrilov and Co, we know that many investors have been putting their money on pause. It seems they have been “waiting for more clarity before striking deals.” And we have reminded them that investors must act this year if they wish to “maximize their tax savings.”
Also on Saturday, Treasury Secretary Steve Mnuchin said the “new regulations will ensure that businesses that are headquartered in zones but do most of their sales elsewhere could qualify.” He further explained, “A lot of people look at the real estate opportunity.” And he added, “But what we’re really excited about is the chance to build new businesses or expand existing businesses in opportunity zones.”
New Opportunity Zone Guidelines: Result of Criticism
On the one hand, some tax experts feared the opportunity zones would only act as handouts to the rich. On the other hand, some local leaders and economic development experts have feared opportunity zone money would end up in urban real estate alone.
- Investors wanted rulings on projects that could establish jobs. They wanted to see the investment also used to establish businesses that would revitalize communities. Thus, they wanted to see their investments used in ways that would yield long term growth in struggling communities.
- They hoped to see investments spent on authentic businesses that could create jobs and economic growth over the long term vision of a community.
It is believed that the new guidelines will lead to this type of involvement as well as bolstering the lagging real estate industry in opportunity zones.
Some States Might Jump on the Bandwagon
We have heard rumors to the effect that some states might also utilize tax breaks to invite investors. We have heard them mention adding additional tax breaks for such projects as affordable housing and solar energy.
Opportunity Zone or Zones
Hassett said the tax break has already buttressed real estate prices in opportunity zones. Zillow states the prices in the zones raised a whopping 20% due to the opportunity zone designation. “And businesses are attracting investment,” he added, “highlighting a lumber mill in a Vicksburg, Miss., zone that recently reopened and started hiring again.”
How the Opportunity Zone Tax Break Works
Consequently, the tax break permits investors to roll capital gains from other investments into the funds. Here’s the good part: taxes on those original gains are deferred. And it gets better. If you hold that investment for years, the government will even defer the taxes. The biggest “attraction is the potential for investors who hold their money in the opportunity fund for a full decade to be exempt from any capital gains taxes on that investment.”
New Guidelines Balance Wishes and Issues
Jessica Millett, the co-chair of the tax department at Duval & Stachenfeld LLP, stated, “The government really wants this to work.”
And she added, “Treasury really did use its regulatory authority to interpret things to help investors.”
They worked hard to balance the wishes of investors, the needs of the Opportunity Zones and the regulations of the tax code.
Secrets of the New Measures
The new guidelines are 169 pages long. But, we will highlight a few of the newly explained and reformed details behind Opportunity Zone rules:
- More Flex in the Timeline:
You’ll have a one year grace period to sell assets and reinvest your proceeds.
- Making A Difference in the Opportunity Zones:
The new regulations detail explanations about how a business can prove it’s active enough to deserve the tax breaks in the zones.
- Depressed Areas: Making Great Locations?
President Donald Trump Highlighted the Zones. He stated, that businesses, “when they see tax rates all the way down to a big, fat beautiful number of zero, they start “liking the location.”
In Fact, small as well as large investors are paying renewed attention to the opportunity zones. Several important investors, such as Goldman Sachs Group Inc., hedge fund EJF Capital LLC and New York-focused RXR Realty LLC have responded. They have “already begun making investments in opportunity zones or are raising money to do so.”
New Rights and New Responsibilities
In the future, the newest rules will require careful data collection. The IRS will need to know how many jobs were created by the funding. Additionally, they need to measure how significant are the changes in poverty levels.
At Gavrilov and Co., we are sure there is more news to come from the amended and extended guidelines. We’ll keep you posted as the experts dissect the new rulings.
As always, thank you for reading the Gavrilov and Co blog and watch for a Part II of this Revisit to the Opportunity Zone Regulations in the near future.