Final Regulations on Opportunity Zones Provide Important Clarity for Investors

December 23, 2019 Updated: December 23, 2019

WASHINGTON—The U.S. Treasury Department on Dec. 19 issued final regulations regarding the “opportunity zones” program, offering more clarity about how investors can qualify for tax breaks.

Passed as part of the Tax Cuts and Jobs Act of 2017, the new program encourages private funds to invest in poor communities by offering substantial tax breaks. The incentive has already started to revive underserved communities, according to experts.

The latest set of regulations, which is 544 pages long, includes major revisions to previous rounds of proposed rules.

“These regulations provide much-needed clarity for communities and investors alike, and will facilitate stronger levels of investment across a range of local needs in designated communities,” Economic Innovation Group President and CEO John Lettieri, whose organization helped craft the idea of opportunity zones, said in a statement.

The final regulations include several significant amendments that provide more flexibility to investors, he added.

The rules offer more clarity on what types of gains may be invested in opportunity zones and when they can be invested. They also address questions regarding the sale of property by a qualified opportunity zone business.

The new rules allow qualified opportunity zone funds to sell individual properties, instead of forcing them to sell the entire fund. They also provide more clarity on the “substantial improvement requirement” for properties in opportunity zones, and explain how large C corporations can invest in these zones.

Through special tax breaks, the opportunity zones program incentivizes private funds to invest in economically distressed communities. The Treasury Department has issued three rounds of regulations so far to provide guidance on how investors can use opportunity zones to receive tax breaks.

Last year, the Trump administration certified 12 percent of U.S. census tracts (8,762 tracts) as opportunity zones. The designation applies for 10 years. The program allows investors to defer taxes on capital gains, if the gains are reinvested in a qualified opportunity fund, an investment vehicle created to invest in any of these designated zones.

Treasury Secretary Steven Mnuchin said in a statement that the opportunity zones program has helped to revive underserved communities and create more jobs for Americans.

“These regulations provide clarity and certainty for investors, which will enhance the flow of capital to new and expanding businesses, and create sustained economic growth in communities that have been left behind,” Mnuchin said.

Almost 50 million Americans live in an economically struggling community, according to a study by Economic Innovation Group. There is also a stark contrast between distressed and prosperous areas in terms of human capital, job creation, and business establishment since the 2008 financial crisis, according to the same study.

The gaps were dramatic, especially in business establishment growth rates. While prosperous ZIP codes gained more than 180,000 new businesses from 2012 to 2016, the distressed ZIP codes lost 13,300 companies during the same period.

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