After two sets of proposed rules, the Treasury and the IRS have now issued their final Opportunity Zone Tax Regulations, which went into effect on March 13, 2020, for tax years beginning after that date. The Tax Cuts and Jobs Act created special tax benefits for investors. A detailed analysis of each benefit would be too lengthy for one blog article, so we will analyze them in a series of articles.
The property purchased by Opportunity Zone Funds must either be new or substantially improved. The statute specifies that substantial improvement of used property must be done by investing at least as much more money into the improvement as the amount of the basis, over a 30 month period of time. However, the improvement rule does not apply to the investment of land.
The statute uses the term “with respect to” as the way the improvement can apply. In the previously proposed regulations, the Treasury and the IRS took the narrow approach to apply the improvement to each asset separately. The final regulations will “apply an aggregate standard for determining compliance with the substantial improvement requirement, potentially allowing the tangible property to be grouped by location in the same, or contiguous, qualified opportunity zones.”
This broader approach means that when new tangible assets are added to a used building, and if they improve the functionality of the building, they will help constitute the substantial improvement that is required. It also means that if the new assets are used in the same trade or business and in the same or a contiguous opportunity zone as the used building, they will also count, as long as they help improve the functionality of the building.
The attorneys at Wilson, Bradshaw LLP welcome your comments and questions regarding Opportunity Zone Funds and Opportunity Zone Property. This recent tax break makes investing in Opportunity Zones such an attractive investment that many investors are wondering if it is too good to be true. It is a great opportunity, but maneuvering successfully through all the requirements of the new regulations makes it risky without expert legal advice. We look forward to hearing your questions and comments on this subject and to provide legal advice to interested investors.