Treasury Department Releases Additional Opportunity Zone Guidance
The Treasury Department released a highly anticipated second set of proposed regulations April 17 providing guidance on Opportunity Zone provisions of Internal Revenue Code section 1400Z-2. The regulations clarify certain issues addressed in the first set of proposed regulations last October and provide additional guidance on significant new issues. The guidance provides more flexibility in structuring Opportunity Zone investments and greater clarity on several issues impacting real estate development, affordable housing, and economic development.
The proposed regulations clarify that the original use of tangible property commences on the date such property is placed in service for purposes of depreciation or amortization, and that property previously placed in service within an Opportunity Zone may be disregarded for purposes of the original use requirement if the property has not been utilized or has been vacant for at least five years prior to purchase. In our comments on the first set of proposed regulations, NCSHA encouraged IRS to consider land or property vacant for a period of at least one year as meeting the original use requirement, arguing that this safe harbor would facilitate the redevelopment of vacant and abandoned properties in distressed communities and greatly enhance the impact of the Opportunity Zone incentive.
The proposed regulations also clarify that the original use requirement is not applicable to land—whether improved or unimproved—and that land does not need to be substantially improved. The Treasury specifically requests comments on whether rules are necessary to prevent transactions such as “land banking” and possible approaches to prevent such abuse.
The proposed regulations also provide significant new guidance for operating businesses in Opportunity Zones, including additional detail on the requirement that at least 50 percent of the gross income of a qualified Opportunity Zone business is derived from the active conduct of a trade or business in the Opportunity Zone. In this guidance, Treasury provides three safe harbors and a facts-and-circumstances test for determining whether an entity meets the 50-percent test. In our comments on the first set of proposed regulations, NCSHA encouraged Treasury to clarify the 50 percent rule and to provide a lower threshold or exceptions to the rule.
Other issues addressed in the proposed regulations include clarification of the substantially all definition in section 1400Z-2, details on transactions that may trigger the inclusion of gain that a taxpayer has elected to defer and the timing and amount of such gain, guidance on the treatment of leased property used by an Opportunity Zone business, and rules on the reasonable period for an Opportunity Fund to reinvest proceeds from the sale of qualifying assets without penalty.
NCSHA will submit comments on these proposed regulations during the 60-day comment period. Please send your comments to Jim Tassos by May 17.
The Treasury Department will issue additional Opportunity Zone guidance later this year on other issues including information reporting requirements.