Trends in Real Estate Investing
Opportunity zone rules are here:
But what does that mean exactly?
By Erik Hayden – Contributing writer, Phoenix Business Journal
Apr 26, 2019, 2:33pm EDT1
At long last, the IRS has come out with what are possibly final regulations on investing in multi-asset real estate funds, as well as startups in opportunity zones. And after the April 17 release of those rules, it’s safe to say the IRS has far exceeded expectations.
Long overdue, these regulations finally provide a sense of clarity and finality that have been missing and are imperative for investors to feel they can safely invest, and in turn enable the program to succeed.
Written into the 2017 Tax Cuts and Jobs Act, the opportunity zone program is aimed at stimulating economic revitalization in distressed communities across the country while allowing investors to defer, reduce and eliminate capital gains tax.
But vagueness in the initial guidelines that came out in October 2018, left opportunity funds' investors feeling confused. For investors, confusion equaled risk, which meant a lot of people waited on the sidelines to see what was going to happen next.
Now that the IRS has acted, here are the clarifications expected to have the most impact:
Language that allows investment in businesses in a qualified opportunity zone. This is a complete game-changer for the program. These new regulations have the potential to create a positive ripple effect across the country.
Multi-asset complexities get a whole lot simpler. Previously, in order to be a successful multi-asset opportunity fund, funds had to become a REIT (real estate investment trust). This was basically a complicated workaround to get funds from point A to B so qualified opportunity funds could give the fund’s profits to customers tax-free after 10 years. Getting rid of the need for this extra complexity makes it much easier for multi-asset funds to comply without all the red tape, making it less complicated to provide tax-free profits to investors and significantly increasing funds’ ability to raise money.
Funds can refinance assets and distribute the profits, tax free. It appears that the guidelines make it easier for qualified opportunity funds to return money to investors quickly — and with the huge benefit of being tax free. It also allows for the possibility of a fund providing profits to investors multiple times over the lifespan of the fund instead of only at the end of 10 years.
Funds can sell assets before the 10-year mark. That is, as long as they reinvest profits from the sales into an opportunity zone within 12 months. This opens the door to possibilities that previously were not even an option.
With these new rules, it has become abundantly clear that opportunity zones are a way for investors to enjoy tax benefits on capital gains while being part of positive social impact in their community.
Going forward, it won’t be shocking to see large and small investors ready to make moves in the market. At the accelerated pace we now expect to see, odds are most 2019 qualified opportunity zone funds will cap out early. Which means we won’t have to wait long to see the positive impact this legislation can have in the community and beyond.
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