Source: CoStar News
By: Mark Heschmeyer
The Treasury Department and IRS issued final regulations on the Trump administration’s opportunity zones program that expand options for real estate investors and clarify issues including the handling of multiple buildings as single property, when certain investments can be made, and the exclusion of gains for tax purposes.
The 544-page regulations provide additional guidance on issues raised by the commercial real estate industry after considering more than 300 formal comment letters and additional taxpayer feedback.
The opportunity zones program offers federal tax breaks to investors in areas deemed to be undercapitalized and serving low-income populations. But the program has been slow to roll out, with the Treasury Department not selecting census tracts for inclusion in the program until four months after it began. The final guidance released Thursday came two years after the program became law and just days before the Dec. 31 deadline for investors to be able to receive the maximum tax benefit under current regulations.
The lack of final clarity has been cited as one reason why capital raising for qualified opportunity funds has not rolled in as expected. Treasury Secretary Steven Mnuchin said in 2018 the Treasury anticipated $100 billion in private capital. Funds formed to invest in opportunity zones report having raised nearly $4.5 billion, according to a new report in the past week from Novogradac & Co., an accounting, valuation and consulting service firm.
The new regulations include some notable rulings for the real estate industry.
The rules clarify that the 180-day investment period generally starts at the close of the shareholder’s tax year. This was an important clarification for real estate investment trust shareholders who typically receive quarterly dividends throughout the year but may not receive the designation that the dividend was a capital gain dividend until after the REIT’s taxable year has ended.
Another major clarification involved the sales of property by a “qualified opportunity zone business.” As previously written, an investor could only elect to exclude gains from the sale of a property sold by a “qualified opportunity fund” and not a business operating in an opportunity zone. The final regulations provide a qualified opportunity zone business held by such a qualified opportunity fund can exclude gains from the sale of a property if it was held for 10 years.
This is an important change for investment funds that intend to hold multiple properties, according to Craig Bernstein, principal of OPZ Bernstein, a Washington, D.C.-based qualified opportunity fund firm. If an investment group has a multi-asset fund, it now has a way to divest property one at a time.
OPZ Bernstein this month funded a $45 million ground-up mixed-use development in Charlottesville, Virginia, that’s expected to include 160 apartments, 20,000 square feet of preleased office space and 28 rental townhomes. The project is a joint venture with Christopher Cos., a Fairfax, Virginia- based developer.
Another major change Bernstein sees in the regulations is clarification on the aggregation of properties.
If an investor owns a site and it has two buildings, and one of them is an older building and the other a newer building, the investor does not have to double the basis of both buildings. All of the money can be invested in upgrades to the older building, Bernstein said.
Another example would be a site with multiple garden-style apartment buildings. If some of the properties have already been renovated, the owner would only have to upgrade the remainder.
Perhaps the biggest change for Bernstein is the reduction of an originally proposed five-year vacancy requirement. Previously, a property that had been vacant for five years was exempt from the requirement of doubling the value through new investment. A qualified fund could go in and lay down carpet, paint the walls and flip on the lights, and still qualify for capital gains tax incentives, Bernstein said.
That five-year period has now been reduced to three years or fewer years in some cases.
Other updates:
Provide a change to leasing provisions in the proposed regulations allowing state and local governments, as well as Indian tribal entities, to be exempt from the market-rate lease requirements.
Provide that both the land and structures in a so-called brownfield site redevelopment are considered to be original use property as long as investments are used to bring the site back to environmental standards. A brownfield site is a property previously used for industrial or commercial purposes with known or suspected pollution including soil contamination because of hazardous waste.
Link to article: Opportunity Zones