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Treasury Releases Proposed Regulations on Opportunity Zones
On October 19, 2018, the Treasury Department issued proposed guidance related to the new Opportunity Zone program in the form of proposed regulations and a revenue ruling. The Opportunity Zone program, created by the Tax Cuts and Jobs Act of 2017, is designed to spur economic development and job creation by encouraging long-term investments in economically distressed communities nationwide. There are currently 150 certified opportunity zones in Louisiana and more than 8,700 nationwide.
The Opportunity Zone program offers capital gains tax relief to investors for new investments in these designated areas. Investment benefits include deferral of tax on prior gains as late as 2026, if the amount of the gain is invested in a Qualified Opportunity Fund (“QOF”). Specifically, a taxpayer that recognizes capital gain from sales to unrelated persons, and within 180 days invests an amount that is less than or equal to the capital gain into a QOF, may elect to defer the reinvested portion of the original capital gain. For instance, the amount of capital gain invested in a QOF may be discounted by up to 10% if the investment is held 5 years and up to 15% if the investment is held for 7 years or more. Further, if the investment is held for 10 years or more, any appreciation associated with the QOF investment will be shielded from capital gains tax.
The proposed regulations provide guidance to those seeking to develop and invest in qualifying projects in Opportunity Zones, including guidance on (i) self-certification and valuation of fund assets; (ii) the types of gains that may be deferred; (iii) the time by which investments must be made; and (iv) the manner in which investors make the election to defer gains.
In addition, Revenue Ruling 2018-29 addresses specific issues pertaining to a QOF’s purchase of an existing building located in a certified opportunity zone. Specifically, the ruling provides guidance on whether such building would meet the original use requirement, and how to measure a substantial improvement made to an existing building.
The issued guidance addressed several important issues; however, the regulations leave some questions unanswered on several key aspects, including what constitutes the active conduct of a trade or business and whether residential real estate qualifies for the program.
The Treasury Department plans on issuing additional guidance before the end of the year.
A map of certified opportunity zones located in Louisiana can be located here.
A copy of the proposed regulations can be found here.
Please see Revenue Ruling 2018-29 in full here.