Opportunity Zone Update
The U.S. Department of Transportation has released an interactive map that provides details about significant transportation-related facilities, such as highway exits, train stations, and bus stops, that are located in or near Opportunity Zones.
Final Opportunity Zone regulations were released in December and provide more flexibility than the proposed regulations. The IRS also released a FAQ document. The rules of the Opportunity Zone program are dense, with multiple deadlines and requirements. OZ investors should seek professional tax and legal advice to ensure they do not run afoul of the rules.
Highlights of the final regulations:
Taxpayers must invest capital gains into a Qualified Opportunity Zone Fund (QOF) within 180 days of being realized. The proposed rules required 1231 gains to be netted against 1231 losses at the end of the investor’s tax year. The final regulations remove the netting requirement. The entire amount of any 1231 gain can be invested without regard to losses, and the 180-day period begins on the date of the sale of the asset.
REIT & Partnership Gains
The 180-day period for REITs & RIC gains starts at the close of the shareholder’s tax year or, at the shareholder’s option, the date when the capital gain dividend is received. Partners in a partnership, shareholders of an S Corp, and beneficiaries of estates and non-grantor trusts have the option to start the 180-day investment period on the due date of the entity’s tax return (not including any extensions).
Triple-Net Leased Property
The final regulations do not relax the treatment for triple-net leased property but do provide two examples. In order to qualify for the OZ tax benefits, a developer must be engaged in the “active conduct of a trade or business.” While merely having a tenant with a triple-net lease may not disqualify a property, it is a negative fact.
In the first example, a developer constructs an office building, which is occupied by a single tenant with a triple-net lease and contains an office of the developer with staff to cover any issues that arise with respect to the triple-net lease. In this example, the developer fails to meet the active conduct requirement.
In the second example, the developer constructs a three-story mixed-use building in which one floor is leased on a triple-net basis and the other two floors are not. The company has an office in the building with employees who carry out the managerial duties for the tenants who don’t lease the building on a triple net basis. In this case, the company does meet the requirement.
Partially Vacant Buildings
OZ investment must generally be made into property that is “original use” to the taxpayer. The proposed rules allowed property that was vacant for five years or more to qualify. The final regulations are more generous. Property that was vacant one year before the Zone was designated – or for three years if it became vacant after that date – qualifies as original use. A property is considered vacant if more than 80% of the building or land (by square footage) is not being used. Property that was involuntarily transferred to local government control also qualifies.
Both the land and structures in a Brownfield site redevelopment are considered to be original use property as long as investments are made to improve its safety and bring it into compliance with environmental standards.