Aiming to answer some of the lingering questions surrounding Opportunity Zones, the Department of the Treasury late last week unveiled a number of new rules and regulations designed to provide clarity to investors on the tax implications of investing in the newly designated areas.
The concept for Opportunity Zones was established by the Tax Cut and Jobs Act of 2017, and earlier this year, the Treasury certified more than 8,700 communities nationwide as Opportunity Zones.
According to the Treasury, approximately 35 million Americans live in areas designated as Opportunity Zones. The median family income of the designated areas are 37% below the area or state median, on average, and those areas have an unemployment rate of nearly 1.6 times higher than the national average.
The program is “designed to spur economic development and job creation by encouraging long-term investments in economically distressed communities nationwide,” according to the Treasury.
Through the program, investors reinvest their capital gains into areas that need investment. Gains can come from any investment, whether that is from stocks, bonds, real estate or partnership interests.
To qualify for the Opportunity Zone tax breaks, investors must invest their capital gains in an Opportunity Fund Zone within 180 days of receiving those gains. The money cannot be invested directly into a property, and funds must invest 90% of their capital into opportunity zone properties.
But there have been some mystery so far as to how exactly the Opportunity Zones will work from an investor and tax perspective.
Now, the Treasury is hoping to clear that up by releasing a series of proposed regulations surrounding Opportunity Zones.
According to the Treasury, the proposed regulations “clarify what gains qualify for deferral, which taxpayers and investments are eligible, the parameters for Opportunity Funds, and other guidance.”
The Treasury said that the new regulations should allow investors and fund sponsors to “confidently enter into new business arrangements in designated Opportunity Zones.”
Here is how the Treasury breaks down the tax benefits of investing in an Opportunity Zone:
Investment benefits include deferral of tax on prior gains as late as 2026 if the amount of the gain is invested in an Opportunity Fund. The benefits also include tax forgiveness on gains on that investment if the investor holds the investment for at least 10 years. Opportunity Zones retain their designation for 10 years, but under the proposed regulations, investors can hold onto their investments in Qualified Opportunity Funds through 2047 without losing tax benefits.
“We want all Americans to experience the dynamic opportunities being generated by President Trump’s economic policies,” Treasury Secretary Steven Mnuchin said in a statement. “We anticipate that $100 billion in private capital will be dedicated towards creating jobs and economic development in Opportunity Zones. This incentive will foster economic revitalization and promote sustainable economic growth, which was a major goal of the Tax Cuts and Jobs Act.”
The Treasury said that it plans to issue additional guidance before the end of the year.
Click here for a complete look at the new Opportunity Zone regulations.
