IRS Publishes Proposed Opportunity Zone Regulations, More Guidance Expected in the Near Future

The IRS has published proposed regulations for the Opportunity Zones tax incentive that was enacted in the Tax Cuts and Jobs Act of 2017. The proposed regulations offer investors and fund managers technical guidance on structuring Opportunity Funds, including clarification that: investors may only receive the tax benefit on capital gains; land value is not included in calculating minimum project costs, providing a more flexible threshold for projects such as affordable housing preservation; and 70 percent of a business’ tangible property must be within the designated Opportunity Zone to qualify for the tax benefit. The proposed rule notes that the Treasury Department and IRS are working on additional published guidance, to be released in the “near future,” that will include information-reporting requirements.

Earlier this year, Enterprise CEO Terri Ludwig testified before Congress on “The Promise of Opportunity Zones” and made two vital recommendations: regulations should be designed to promote the transparency of Opportunity Fund activities, and to ensure accountability and prevent abuse. This should include collecting transaction-level data from Opportunity Funds so that the public and Congress can evaluate the efficacy of the Opportunity Zones tax incentive. Congress and the Treasury Department should also enact federal guidelines to explicitly prevent Opportunity Fund investments that would disproportionately harm low-income residents and local businesses. Representative Fred Upton (R-MI-6) and Maurice Jones, President and CEO of the Local Initiatives Support Corporation (LISC), recently made a similar point that the Treasury Department should provide sufficient oversight to protect against program abuses and facilitate the collection of the necessary data to determine whether the incentive is working as intended. A recent Wall Street Journal article helps show why tracking impacts in Opportunity Zones will be particularly important, as it notes that Opportunity Zones across the country have been witnessing spikes in property sales activity from investors anticipating that prices will rise when the new funds put money to work. An analysis by Real Capital Analytics found that sales of development sites in Opportunity Zones nationwide have increased 80 percent in the first three quarters of 2018, and owners in some Opportunity Zones have doubled their asking prices, expecting higher demand.

Please submit comments to the IRS by the December 28 deadline to identify ways to improve the regulations and prevent abuse of this economic development tool. Stay tuned to the Enterprise blog and Opportunity Zones webpage for additional information.

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