Last year, we published an article outlining the 2017 Opportunity Zone legislation that provides tax incentives to investors who want to reinvest unrealized capital gains on a tax-deferred basis by putting those capital gains into “Qualified Opportunity Funds” that are dedicated to investing in businesses operating in low-income communities designated as “Qualified Opportunity Zones.” The original article, which outlines the program and the definitions used in this article, is located here:
Important New Rules for Opportunity Zones
The Department of the Treasury recently released a second set of proposed regulations providing additional guidance on how to comply with the program in order to receive tax benefits. Important new rules include the following:
1. The “original use” of tangible property begins when any person first places the property in service for purposes of depreciation, or if they could have depreciated the property had they been the owner. In addition, if property has been vacant for five years, the next taxpayer to place the property in service for depreciation purposes will satisfy the “original use” test.
2. Clarification of the “substantially all” requirements:
- For use of property for purposes of being “Opportunity Zone Business Property,” at least 70% of the use of the property is in a Zone.
- Tangible property must be “Opportunity Zone Business Property” for at least 90% of the Fund’s holding period
3. At least 50% of the gross income of a Business must be derived from the active conduct of a trade or business in a Zone. The new guidance provides three safe harbors to satisfy the 50% test:
- if at least 50% of the hours spent by employees and independent contractors are within the Zone.
- if at least 50% of the amount paid by a Business to employees/contractors are for services performed within a Zone.
- if the tangible property located in a Zone and the management or operational functions performed in the Zone are each necessary for the generation of at least 50% of the gross income of the Business, the test is met.
4. Ownership and operation of real property constitute the “active conduct of a trade or business,” but “merely entering into a triple-net lease with respect to real property owned by a taxpayer is not the active conduct of a trade or business.”
5. Tangible property acquired under a “market rate” lease qualifies as “Opportunity Zone Business Property” if during substantially all of the holding period of the property, substantially all of the use of the property was in a Zone.
6. Regarding transfers, if the transfer is by gift, the deferred gain may become taxable, but transfers upon death are generally not taxable.
7. If the majority of a contiguous property is located within a Zone, compared to the amount of property outside of the Zone, then all of the property would be deemed to be located within the Zone.
Opportunity Zone Index
As reported recently in The New Orleans Advocate, Develop LLC and Esri created an Opportunity Zone Index, which measures metrics like income, retail sales and percentage of people with university degrees to determine the most attractive opportunity zones for investment.
Louisiana Legislature Bills on Opportunity Zones
The Louisiana Legislature is also considering bills to provide additional incentives for investments in Opportunity Zones. Articles on these bills are linked below.
New Opportunity Zone Regulations
You can read the full text of the new regulations here:
LED’s New Opportunity Zone Web Portal
Louisiana Economic Development, in partnership with The Opportunity Exchange, recently launched an Opportunity Zone Project web portal that allows project sponsors (developers) to submit Opportunity Zone projects for exposure to potential investors. Investors can then search the website for Opportunity Zone projects to invest in. 46 projects across Louisiana are currently posted on the website, linked below.
Have questions about the Opportunity Zone regulations?