Boarded up facade of foreclosed building in Harlem, New York CityGetty
14,000 unpaid IRS workers decided not to show up to work last week, due to the prolonged government shutdown, according to the Washington Post. Now that the government has reopened temporarily, the IRS’s timely focus on Opportunity Zones will be critical if the program is to become the boon for investors and low-income communities that many have anticipated.
Tax season, which starts this week, may prove to be a higher priority for the IRS, but hopefully the IRS can manage both. The Opportunity Zone program, which was rolled out as part of President Trump’s 2017 Tax Cuts and Jobs Act, has garnered support from investors and community advocates around the country who are eager to begin igniting the economic revitalization that Opportunity Zones are likely to create.
But the end of 2019 is a critical deadline for investors to receive a 15% capital gains tax reduction through investing in an Opportunity Zone. If they are to maximize on this tax holiday, they need the IRS’s urgent attention.
In October 2018, the US Treasury released interim guidance on the program, saying buyers could begin investing in OZ-qualified properties or businesses right away. What’s prevented some investors from doing so is the lack of clarity about the program, with no new timeline in place for when final, specific guidelines will be written into the law.
“An eligible taxpayer may rely on the rules…before the final regulations’ date,” says the interim guidance, “…but only if the taxpayer applies the rules in their entirety and in a consistent manner.”
In other words, invest now under this set of rules, consistently and in their entirety, but be warned that those rules could transform in multiple ways once public comment is taken into consideration and specificity is ultimately decided upon.
This is fine for projects that are conservatively within the bounds of the interim regulations. But bolder real estate projects and any investment in businesses within Opportunity Zones are still fraught with too many questions.
At best, uncertainty about the final guidelines makes investors extremely conservative and risk-averse. At worst, it could be preventing them from participating in the program at all, which will no doubt present challenges for low-income communities that are in need of recovery projects and are relying on Opportunity Zones to kindle investment interest.
Investors have patiently awaited clarification, but the public hearing that was supposed to have been held on January 10, 2019, before the IRS, which would have answered looming questions and shaped the final guidelines, was indefinitely postponed because of the government shutdown.
US Senators and House representatives even expressed concern last week, in particular over details about operating a business within a qualified Opportunity Zone. In a bipartisan letter sent on January 24, Senators Tim Scott and Cory Booker, among others, urged Treasury Secretary Mnuchin to “address key issues that are critical to this provision working according to Congressional intent.”
By the December 28, 2018, deadline for public input, no fewer than 145 comments about the OZ program were submitted by representatives of housing agencies, development councils, real estate associations, local municipalities, property investors and private citizens nationwide, according to the Regulations.gov docket.
They covered issues as widespread as:
- How Opportunity Zones will work alongside other tax incentives, like the Low Income Housing Tax Credit and New Markets Tax Credit;
- Whether the program would be open to Employee Stock Ownership Plans (ESOPs);
- If it would include clean-fuel transportation vehicles, like barges, that are docked inside OZ’s but that deliver goods outside of them;
- How to guarantee real benefits get built into low-income communities (e.g. hiring local labor for new businesses and ensuring investors of color get adequate access to new contracting opportunities);
- Vague verbiage (e.g. what precise fiduciary requirements are needed to operate an Opportunity Fund?)
Without answers to these and other questions, investors may be shying away from the program. Unfortunately, the clock is ticking. 2019 is the last possible year to maximize on this 15% capital gains tax reduction, which is an enticing incentive in the legislation. A 10% reduction in capital gains tax is still achievable for investments made by 2021. But the 15% savings will only apply to investors who:
- Take capital gains from the sale of a previous investment,
- Reinvest those capital gains, within 180 days of the previous sale, into an Opportunity Zone-qualified property or business during calendar year 2019, and
- Hold onto that new investment for a minimum seven years, or until December 31, 2026, whichever comes first.
Given the stringent 180-day requirement that’s imposed on buyers to use their funds to reinvest in an OZ, every day that passes while the IRS gets back to full operations narrows the timeline investors can maximize on this generous tax holiday.
Even while they are accustomed to uncertainty, investors don’t want to miss out on the chance to spur economic revitalization. All they can do right now is prepare to jump aboard as soon as the Opportunity Zone final regulation process kicks back into gear.