Opportunity Zone – Post Regulations. Where Are We Now?
The final OZ Regulations were issued by Treasury on December 20, 2019, of which there had been many comments related to the same. On the whole, it is generally believed that the Regulations have added a lot more certainty to the process and it is hopeful that there will be an increase in Opportunity Zone involvement going forward.
It is noteworthy that President Trump, in his State of the Union Address on February 4, 2020, highlighted the OZ program and notably recognized the Republican Senator having a major role as a sponsor of the bill. He did include Senator Cory Booker, who was also a co-sponsor of the bill along with Republican Senator Scott of South Carolina.
There are certain open issues still remaining in the OZ program that clearly need clarification. The very lengthy Preamble to the actual Regulations provided guidance as to various factors.
We have come across one major issue that clearly needs to be addressed. On pages 22 through 24 of the Preamble, there is detailed discussion as to what is a so-called "rollover" of an investment upon a sale of the asset into a new project. This would include the sale of a property whereby one of the principals of the selling entity is also involved as an owner in the purchasing entity. This may be common where a sponsor that owns existing properties sells it to a new entity in which the sponsor does not own more than 20 percent of the capital interest or profits interest, thus making the purchase asset a good asset for OZ purposes. The concern here is the fact that in the Preamble the following issues are raised:
- If capital gains are generated from the sale of the property purchaser to the sponsor of the purchaser entity, can the principal use those capital gains proceeds to invest in the new entity and obtain the benefit of the OZ Program? The Preamble seems to provide limitations with respect to same. Furthermore, what if the amount invested in the purchaser entity was less than the total amount realized on the sale?
- The Preamble also provides for language that could potentially taint the entire asset from an OZ standpoint as a non-qualified OZ asset due to the potential rollover by the sponsor of funds received from the sale. For purposes of example, if the sponsor invests $1,000,000 in the purchaser entity, and that represents 10 percent of the capital into the purchaser entity, would that only exclude 10 percent of the value of the acquired asset or 100 percent of the value of the acquired asset, if there is any exclusion at all?
These questions were going to be addressed along with other ones at an IRS tax conference that took place in Florida at the end of January. The IRS would not allow its staff personnel to be involved on a panel or answer any questions pending related to the OZ program pending further review. Therefore, the IRS invited commentary to clarify this issue and other issues as well.
In the meantime, there have been protests noted in newspaper publications about new Legislation that could be introduced by certain Legislators related to designated OZ areas that should not have been designated opportunity zones in an effort to potentially modify the program to eliminate certain projects.
The regulatory process is ending and we will continue to provide updates related to any positions taken by the IRS to clarify various uncertainties contained in the final OZ Regulations.