RISMedia's Real Estate Magazine

JUN 2019

Real Estate magazine is the industry's leading source for real estate news and information since 1980. Published monthly by RISMedia, Real Estate magazine offers timely and relevant real estate news to the industry's top brokers and agents.

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RISMedia's REAL ESTATE June 2019 13 {Policy Matters} A fter much anticipation (and a significant delay), the Treasury Department re- leased the second round of proposed rules for the Qualified Opportunity Zone (QOZ) program on April 17, 2019, building upon ear- lier proposed rules that provided the framework for the program. The rule release coincided with a White House Opportunity Zone Con- ference, which the National Asso- ciation of REALTORS®' (NAR) 2019 Commercial Liaison, Bob Turner from Memphis, Tenn., attended. The event featured President Don- ald Trump and Housing and Urban Development (HUD) Secretary Ben Carson as speakers, focusing on the Administration's commitment to making the program a success. This second round of rules fills in many unknowns about the program and how it will work. For those who are unfamiliar with QOZs or need a refresher, the program is a cre - ation of the Tax Cuts and Jobs Act of 2017, intended to drive new in - vestment, jobs and development to underserved communities des - ignated as "Opportunity Zones." It provides several types of tax relief for investors who reinvest capital gains into QOZs: • Taxes can be deferred on capi - tal gains reinvested within 180 days into an "Opportunity Fund" (O Fund) until the earlier of Dec. 31, 2026, or the date the inter - est in the O Fund is sold. • If reinvested gains are held in an O Fund for at least five years, there is a 10 percent reduction in the capital gains tax due; if held for seven years, that in - creases to 15 percent. • Appreciation on reinvested capi - tal gains held in an O Fund for at least 10 years is tax-exempt. The new rules provide clarity on many aspects of the program left uncertain by the earlier proposal. For example, tangible property pur - chased by an O Fund in a QOZ must be either "original use" or "sub - stantially improved"—but original use had been undefined. We now know that original use commences with the depreciation of an asset. This is positive news for real es - tate, as it allows O Funds to pur- chase incomplete projects in QOZs and meet the original use require - ment as long as the property has not depreciated yet. There is also guidance on vacant or abandoned property—if it has been in that condition for at least five years, the original use commences with the purchase by the O Fund. Less than five years, and it must meet the substantial improvement require - ment: investing an equal amount into the asset as its purchase price, not including the basis of the land it sits on. There is also more information on QOZ Business Property, which must be used in the active conduct of a trade or business (so simply investing in land does not qualify). Leased tangible property qualifies as long as the lease was entered into after 2017 and meets the same requirements as owned prop - erty. Additionally, there is guidance for property straddling a QOZ—if it is contiguous, and the value of the portion within the QOZ is greater than that outside of it, all of the property is considered QOZ busi - ness property. Even with these new proposed rules, there are still questions about the QOZ program. One un - addressed area is data reporting requirements, which are important both to protect against fraud and abuse and to track the effective - ness of the program—what types of investments and developments are successful versus not, and where the program is working best. HUD and the Treasury Department are currently seeking input on what those requirements should be. The Administration is on track to have final rules by the end of 2019, barring any delays. Until then, the proposed rules are effective, and with the new information from the second round, we expect to see par - ticipation in the program increase rapidly in the coming months. RE Erin Stackley is NAR's senior representative for Commercial Legislative Policy. New Rules Provide Important Details for Opportunity Zones This column is brought to you by the NAR Real Estate Services group. by Erin Stackley

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