IRS Issues Final Regs on Opportunity Zones
Nearly two years after the Opportunity Zone initiative was enacted into law as part of the 2017 Tax Cuts & Jobs Act, the Treasury Department and the IRS has issued final regulations on Qualified Opportunity Funds. The final regulations are a modification and merger of the first and second tranches of regulatory guidance and provide additional clarification on topics that remained unresolved after the first two sets of proposed regulation. In total, the notice is 544 pages in length.
The IRS completed the final regulations and submitted them for review to the Office of Information and Regulatory Affairs (OIRA) on Dec. 6. OIRA completed its review on Dec. 17. The final regulations don’t officially take effect until they’re published in the Federal Register. Treasury Secretary Steven Mnuchin said in a statement that the new regulations will provide “clarity and certainty” to investors that will allow for more capital to flow into Opportunity Zones.
The regulations address rules surrounding aggregation of developments on one property to meet the substantial improvement requirement and what happens to investments pulled out of Opportunity Zone funds before the 10-year hold period is over. Also addressed in the document are qualified Opportunity Zone businesses, or QOBs, including a 5 percent maximum investment in “sin businesses” that would otherwise be disqualified from the tax break.
In preliminary versions of the regulations, only alterations to an original building on an OZ property would count toward the threshold of “substantial improvement,” which requires owners to essentially double the value of a property with its investment. The final regulations allow for the improvement threshold to apply to the property in aggregate, meaning additional buildings and development can be counted as adding value to the lot itself.
Since the second round of regulations and guidance was released in April, the only official update to Opportunity Zone rules came in November with a new IRS tax form, Form 8996, outlining some reporting requirements for tax documents relating to QOFs. Only a draft of Form 8996 has been published, with no timetable for the release of a finalized version. In its current iteration, Form 8996 requires disclosure of all of the investments the QOF has made, the census tract in which those assets are primarily located, and the value of those assets as measured at certain specific times in the year.