On Dec. 19, 2019, the IRS published final regulations on Opportunity Zones. In a commentary on Bloomberg Tax, Forrest David Milder partner in the law firm Nixon Peabody, LLP, discusses the highlights of the 544 page regulation publication.
Key details Milder notes include the 180-day investing period, the “100% Substantial Improvement Rule,” and tax consequences of sales after 10 years, which Milder notes is the “biggest change of all.”
“The final regulations have adopted many of the post-10-year disposition changes requested by the investment community,” Milder states. “As a result, each of the following is eligible for favorable tax treatment after ten years: sale of a QOF interest held by an investor; sale of a directly owned property by a QOF; sale of an interest in a partnership, limited liability company, or stock held by a QOF; and sale of property held by a QOZB partnership, LLC, or corporation in which the QOF invests.”
For residential investors, used property is generally not eligible for favorable treatment unless it is “substantially improved.” The final regulatons, Milder notes, have adopted a broader, “aggregate” rule, with have two sets of substantial improvement rules.This will require developers and their advisors to closely study the rules with each rehabilitation.
One set of new rules allows for improvements to buildings on contiguous parcels, or buildings located on a single parcel and transferred in a single deed. To aggregate under this rule, all of the buildings must receive some rehabilitation
In November 2019, shortly before the final regulations, the U.S. Department of Housing and Urban Development (HUD) Secretary Dr. Ben Carson announced the Federal Housing Administration will offer new incentives to borrowers interested in rehabilitating homes in Opportunity Zones.
The new incentives are part of the expansion of its Limited 203(k) Rehabilitation Mortgage Insurance Program for homes in Opportunity Zones.
“In the end, I think that the IRS deserves a great deal of credit for working its way through so many comments and suggestions and applying an excellent measure of flexibility at many turns,” Milder concludes. “At the same time, I think we can expect to uncover many more investment opportunities and obligations as we spend more time with the regulations and working through investments with taxpayers, developers, fund organizers and managers.”