Opportunity Zone new guidance: Top four clarifications

In July 2018, the U.S. Department of the Treasury certified 8,700 Opportunity Zones (OZs) that qualify for tax incentives created by the Tax Cuts and Jobs Act of 2017, meaning that developers and investors who revitalize properties in these zones will receive these benefits. The goal was to attract capital for addressing affordable housing shortages and creating jobs in low-income communities.

However, the initial regulations left most investors scratching their heads. Many investors seemed interested, but unwilling to take advantage of the incentive until the U.S. Treasury answered a few key questions. This past fall, the U.S. Treasury department issued an updated and improved guidance, and we are happy to report that many of these questions have been answered.

In our latest report, we grouped the updates into four different categories: those concerning gains, OZ businesses, Qualified Opportunity Funds (QOF), or building and land matters. Our report shows several important clarifications made within each category, the top four being:

1. Opportunity Zones are for capital gains only, meaning that other gains, such as dividends and royalties, cannot be directed into a fund.
2. The Treasury initially stated that “substantially all” of a partnership or corporation tangible property owned or leased must be qualified opportunity zone business property. There was uncertainty about what “substantially all” meant. The Treasury has concluded 70 percent represents “substantially all.
3. Investors can now take advantage of basis step-up election at sale of the QOF investment, under the proposed regulations until Dec. 31, 2047.
4. Original use and substantial improvement requirements only relate to the structure and not the underlying land.

While the latest updates address enough of the original ambiguities to promote investor participation, there are still significant questions that will need to be addressed moving forward, and we expect the Treasury to issue further guidance moving forward.

In the meantime, we are monitoring where in the country funds are gaining the most traction, and what structures and products are most attractive. Our goal is to create the bridge between the funds and the developers and investors that can best take advantage of this unique capital source.

Walker & Dunlop can help fund your affordable housing vision. Contact us with any comments or questions.