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A Quick Update on Opportunity Zones

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The IRS held a public hearing on July 9th to address the second set of proposed regulations related to Opportunity Zones. We are going to assume that readers have a passing familiarity with Opportunity Zones (OZs) but, for the uninitiated, OZs offer a series of tax benefits that allow for the deferral and permanent exemption from tax of capital gains that are reinvested in designated low-income communities. The OZ tax incentives were created as part of tax reform at the end of 2017. The law, while well intentioned, was poorly written and widespread confusion and panic ensued. To catalyze investment in these historically underdeveloped and distressed areas, the IRS and Treasury attempted to provide clarity through the issuance of proposed regulations in October of 2018 and April of 2019. The hearing last week was to solicit feedback on the proposed regulations before they go final.

A wide array of stakeholders were afforded the chance to speak, and the most frequent issues that were raised included:

  • The need for some kind of mandatory reporting to measure the impact of investments
  • Ensuring that the sale of underlying assets and the sale of equity in an Opportunity Zone investment receive equal tax treatment
  • The need for an aggregate approach to Substantial Improvement instead of an asset-by-asset approach
  • Revision of the rule that you have to wait until the end of the year before reinvesting Sec. 1231 gains

Several speakers advocated for wholesale changes to the law as well, though those suggested changes fall well outside of the scope of Treasury’s regulatory ability.

If Treasury follows a similar timetable to its earlier actions, we are about 2 months away from the next round of guidance. We are monitoring the activity in this area and will report any developments as they happen. In the interim, Berntson Porter & Company is actively working with Opportunity Zone developers and investors. If you have questions about investing in OZs, creating a fund, or how the tax benefits may apply to you, please contact Brendan McAuliffe at bmcauliffe@bpcpa.com.

Click here to read more about Opportunity Zones.