Author: Brad A. Molotsky

Putting aside partisan points of view on the wall and whether a government shut down to get a wall paid for is a good idea, the shut down is already impacting US Treasury’s ability to finalize new regulations to clarify certain aspects of the Opportunity Zone program.

Comment letters have been sent in by various trade association and OZ groups my team and I are involved with to the IRS and Treasury but, unfortunately, the clarity we are looking for will need to wait until the shutdown has been resolved plus two weeks thereafter (at least) per a notice posted in the Federal Register.  Open issues that the Real Estate Roundtable, Novogradac’s OZ team and others are seeking include the following:

• Defining original use and substantial improvements
• Two tiered structures and the “working capital” impact – 31 months
• How vacant land might qualify as “original use” property
• Clarifying how and when the 180 day rule applies to certain pass through entities
• Clarifying how Section 1231 gains of pass through entities are eligible for deferral
• Seeking a removal of the fixed end of 2047 for sale purposes to qualify for a stepped up basis
• Clarification regarding the methodology for applying the 90% and 70% asset tests
• Requesting limitations on non compliance penalties to the portion of the aggregate assets of a QOF that are funded with gains for which a deferral election has been made
• Definition of “substantially all” –  keeping the definition at 70% and generally requiring real property businesses to hold 90% of tangible property inside a QOZ
• Clarifying if property that straddles a QOZ can treat the improvements as being all within the QOZ
• Clarifying the requirement that a substantial portion of the intangible property of a QOZB be used in the “active conduct of a trade or business” in the QOZ
• Clarifying the timing of capital gains and dividend treatment for REITs

While our clients are still closing deals and effectively using the OZ program to defer, reduce and ultimately, hopefully, create a capital gain free sale after 10-years at the federal level, additional clarity would, in fact, be nice.

Border security for sure, but let’s get these rules clarified now so we can spur investment where its needed without the histrionics and the child like tantrums.

See attached Novogradac letter to US Treasury for more details – https://www.novoco.com/system/files/group/Opportunity%20Zones%20Working%20Group/novogradac_wg_comment_letter_proposed_regs_122818.pdf