“But sometimes you might not be able to finish a project in 31 months. So, the new rules said if the delay is due to basically getting government permits, that won't cause you to run afoul of these rules,” says LaFalce.

The proposed rules state, “[E]xceeding the 31-month period does not violate the safe harbor if the delay is attributable to waiting for government action the application for which is completed during the 31-month period.”

Prior to the new regulations, LaFalce says this was one of the biggest concerns in the real estate industry. “Because frankly, 31 months is not long enough in all cases. Sometimes the process of working with local and state government to get all the necessary permits can take a year or two, sometimes just to get through that process,” he states. “Developing a large office building could take another 24 or 36 months on top of the permitting process.”

LaFalce says what could use more clarification is that the law currently states the working capital safe harbor applies to a qualified Opportunity Zone business. But he notes what often happens is a qualified Opportunity Fund gets capital from its investors and then the qualified Opportunity Fund usually forms an entity which is going to be a qualified Opportunity Zone business. That business is usually the one that is going to develop the real estate and the entity that uses the working capital safe harbor. “There was a hope that they would extend the working capital safe harbor rule to a qualified Opportunity Fund, so the fund itself does not necessarily have to drop the assets into a subsidiary entity,” says the tax expert.

He notes the new regs did not extend the rule to the qualified Opportunity Fund. But LaFalce notices although the IRS was silent on the issue, they changed the forms. These now give an impression based on the instructions that the rule about the working capital safe harbor applies to a qualified Opportunity Fund. He says many in the legal community had assumed the new proposed regulations would have confirmed that.

However, he states the new regs are generally favorable to the real estate world.

LaFalce emphasizes the most important change was allowing a qualified Opportunity Fund to sell assets after 10 years and to allow investors to get the step-up basis, as previously reported on GlobeSt.com. He describes the previous rule as making the program inoperable. With the new regs, the tax lawyer comments, “The IRS effectively found a way for the transactions to line up with marketplace practices which is to have the entity sell the assets rather than having the investors have to sell their interests in the entity.”

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