Tax Credit Partner Discusses New IRS Tax 'Opportunity Zones'

Despite the potentially sizable benefits opportunity zones offer investors, many have stuck to the sidelines, waiting for the government to answer questions about how the program will actually work, experts said. The Internal Revenue Service offered some guidance on October 19, floating possible rules that would govern taxpayers’ ability to defer capital gains by putting money into these zones.

The proposal may not have instantly put shovels in the dirt, but experts believe it has at least started the ball rolling toward construction that could start in 2019.

“This is a game-changer in terms of giving people enough information where now they’ve got some comfort moving forward with projects,” said Pillsbury Tax partner Thomas D. Morton.

The opportunity zone program, created by the Tax Cuts and Jobs Act of 2017, allows taxpayers who profit by selling property or an investment to kick those capital gains down the road and not immediately include them as part of their income. They can do so if within 180 days they invest an equal amount in a qualified opportunity fund serving opportunity zones.

Prior to the guidance, the tax code seemed to say that investors only had six months between making their investment and when they’d have to start paying penalties for failing to spend on a project, Morton said.

The 31-month safe harbor, however, gives investors a good amount of time to see something get built, though Morton said it may still not be enough time for a large or complicated project to go up.

“In some areas, it can take you 31 months to get permits to build an ice cream stand,” he quipped.

The IRS’ clarification of “substantial improvement” may also open the door to more renovations and rehabilitation of existing buildings in opportunity zones. Before, a number of clients considered it easier to invest in new construction, Morton said.

That’s because the agency’s proposal says the original purchase price of the land a building is on doesn’t count toward determining whether or not the structure has been substantially improved. So instead of having to show they upped the value of a $5 million property that included a $2 million piece of land, the $3 million value of the building would be the starting assessment, experts said.

“That doesn’t completely solve the issue,” Morton said. “But it lowers the barrier enough where it puts back into play rehabilitation rather than people moving directly into new construction.”