The IRS released the latest guidance on opportunity zone projects last week, and now projects in these markets will likely takeoff. Of course, many investors have gotten an early start—with a handful of projects already breaking ground even before the final regulations had been released—but these new regulations will certainly increase fundraising and investment activity.
“The regulations will increase fund raising and investment activity,” Phil Jelsma, partner and chair of the tax practice team at Crosbie Gliner Schiffman Southard & Swanson LLC, tells GlobeSt.com. “The industry was waiting to see how the IRS would address many issues in need of clarity, which the new regulations addressed. Ultimately, the newly rolled out regulations underscore the flexibility afforded QOFs and their investors.”
While early investors felt the tax benefit was reason enough to leap into this new market, the new regulations provide clarity that will help to fuel more activity, especially for investors seeking guidance. “The new regulations clarify a number of areas in which investors had sought guidance about this powerful investment tool, providing important new rules, particularly with respect to ground up development,” says Jelsma. “The fact that the IRS did not require significant improvements on ground up development suggests a great deal of flexibility in planning transactions. The new regulations make it easier for investors to understand opportunity zone investments and will help encourage new opportunity zone funds.”
Specifically, the new regulations define the “original use” verbiage, defining original use as the first use or placed-in service date for purposes of depreciation. “Generally, the property acquired by the opportunity zone fund must either be substantially improved by the opportunity zone fund or the original use must commence with the opportunity zone fund,” explains Jelsma. “The new regulations say if the building has been vacant for five years, the original use starts when the opportunity zone fund acquires the property or if the property has never been depreciated, new building or ground-up development, original use starts when the opportunity zone fund puts the property into service, or in other words starts depreciation.”
While this round of regulations should provide clarity to investors, opportunity zones are still new and there remain areas of question. “There is now clarity on forming a fund and on acquiring or improving property,” says Jelsma. “I think the IRS still needs to clarify how investors are treated when they exit the opportunity zone fund.”
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Kelsi Maree Borland
