Opportunity Zone investors have been given a lifeline that broadens the parameters of their playbook, but experts say they’re still not out of the woods.
The IRS has issued the new guidance in response to the ongoing COVID-19 pandemic that gives investors five more months to find projects that fit within the program’s guidelines.
Created by the 2017 Tax Cuts and Jobs Act, the Qualified Opportunity Zone program promises tax relief to investors who back development projects in designated low-income areas.
Investors who sell assets that have appreciated in value—typically real estate holdings or stock portfolios—can defer capital gains tax for 10 years if they re-invest their profits into a Qualified Opportunity Fund, which has to keep 90 percent of its capital in designated census tracts, or zones. At the end of the program, investors can receive a basis reduction of up to 15 percent on their initial gains and pay no taxes at all on proceeds from the fund.
Jonathan Woloshin, head of US real estate at UBS Global Wealth Management’s Chief Investment Office, said, “All else being equal, the extension of the time frames should be a positive for opportunity zone investors.”
Steven Meier, chair of law firm Seyfarth’s Corporate department and co-chair of its national tax practice, said the IRS has made “substantial accommodations” in the midst of the pandemic address the challenges presented by COVID-19.
Gains that needed to be invested on or between April 1, 2020 and December 31, 2020 to meet the program’s 180-day deadline has been extended to December 31, 2020.
The 30-month requirement for sites to undergo substantial improvement has also been extended by nine months and the Working Capital Safe Harbor that allows Funds to hold onto cash while the market restabilizes has been extended up to 24 months.
“This is all very positive news,” said Meier. “What Notice 2020-39 does not deal with, however, is whether the ‘written plan’ used by a Qualified Opportunity Zone business to comply with the Working Capital Safe Harbor is still required to be effectuated in a manner ‘substantially consistent’ with the original written plan as required under the Opportunity Zone regulations, or whether a greater degree of deviation from the original written plan is allowable in light of the market upheaval that has arisen from COVID-19.
“This is especially relevant for QOZ projects that had meaningful hospitality elements (hotels, restaurants, entertainment facilities) for which transaction execution is in material peril due to the impact of the COVID-19 pandemic on those business sectors.”
The 2017 tax law created capital gains tax breaks for investors who funnel profits from stocks, bonds, and other assets into funds that finance projects in nearly 9,000 census tracts designated as opportunity zones.
According to NES Financial, in the post-COVID world, Opportunity Zones will bring crucial economic stimulus, job creation and Main Street revitalization to distressed communities around the country.
“Despite the economic downturn, OZ charges ahead, with more than $10 billion now invested in QOFs across the country,” said NES in a recent blog. “Given the huge amount of capital gains generated in the recent market selloff, evolving legislation in the wake of the pandemic, and a growing emphasis on social and community impact among investors, we expect this momentum to continue.
“In fact, we believe the Opportunity Zones initiative will be a key driver of economic stimulus, job creation and equitable recovery in the months ahead. The nationwide outbreak of COVID-19 has disproportionally hurt low-income communities, and OZ will help ensure the post-pandemic recovery supports distressed areas — exactly as its authors intended.”
