5 Changes to Opportunity Zone Regulations - Commercial Real Estate Tax

Treasury Department Clarifies Commercial Real Estate Tax Regulations Regarding Opportunity Zones

The United States Treasury Department recently released the second round of regulations regarding Opportunity Zones. When originally introduced in 2017, the prospect of commercial real estate tax incentives for real estate investments offered in Opportunity Zones excited many investors. Yet many of these same investors have hesitated to invest due to uncertainty about these commercial real estate tax incentives. As a result, the Trump administration formulated this 169-page document to clarify things for investors.

Opportunity Zones: The Basics

Originating in the 2017 Tax Cuts and Jobs Act, Opportunity Zones are economically-distressed communities where certain new investments could qualify for tax incentives. The goal of these zones is to stimulate economic development. For example, Houston alone has 150 Opportunity Zones like Hillcroft-Harwin on the Southwest Freeway and Downtown Houston.

Hurricane Harvey impacted many Houston areas in 2017. As a result, many still have a real need for capital investments.

5 Recent Changes to Opportunity Zones

To help you better understand Opportunity Zones and commercial real estate tax incentives, below are 5 recent changes to the regulations that you should be aware of:

1. Business-friendly guidelines

Previously, the guidelines stated that 50% of a business’s total gross income must come from activity within a qualified Opportunity Zone. Yet this was no entirely clear. To clarify this 50% rule, these new round of regulations offer several ways to meet the criteria:

  • 50% of employees’ or contractors’ works hours must be spent within the Opportunity Zone. These hours must total at least 50% of the business’ total hours worked.
  • Also, 50% of the business’ services must be located within the Opportunity Zone. In addition, payments to employees and contractors must be 50% of the total dollars paid for these services.
  • Business management operations based in the Opportunity Zones (or zones) must be necessary to generate 50% of all gross income.

On top of that, the new guidelines allow extra consideration for businesses under a ‘facts and circumstances’ based on case-by-case scenarios.

2. Opportunity Zone Properties Straddling Non-Opportunity Zone Areas

Owners can receive tax benefits if the majority of the property lies within an O-Zone.

Based on numerous questions about property locations, the new regulations clarify whether a property can be partially located in a non-Opportunity Zone. The verdict is that owners can receive commercial real estate tax benefits as long as the majority of the property’s square footage lies within an Opportunity Zone. Furthermore, the square footage outside the zone must be contiguous to a portion or all of the property that is located within the zone.

3. Rules Regarding Reinvestment and Commercial Real Estate Tax

In the October 2018 regulations, investors originally inserted a 31-month ‘safe harbor’ period. During this period, an investor was able to invest in Opportunity Funds (O-Funds) before fully investing into real estate. The new regulations add a business development aspect which will also benefit from the 31-month safe harbor.

What’s more, qualified O-Funds will now be given a one-year grace period. Within this time frame, investors may sell assets and reinvest proceeds into other Opportunity Zone investments. This new rule reduces investors’ risk by giving them more time to make good investment choices. It also increases flexibility by allowing investors a full year to sell assets and then reinvest those funds without tax penalties.

A flooded street in Houston post-Hurricane Harvey.

4. Vacant Properties

Previous guidelines stated that investors needed to meet a substantial improvement provision on properties in Opportunity Zones. Because of this provision, investors needed to undertake significant upgrades to certain types of properties. However, under the new regulations, properties that have been vacant for a significant time period will qualify immediately for the commercial real estate tax breaks. Currently, any abandoned or run-down property purchased within an Opportunity Zone doesn’t need to meet the prior improvement provision.

5. Inheritance of Opportunity Zone Assets

According to the first round of regulations, your children would not benefit from your Qualified Opportunity Fund (QOF) investment in the event of your death. The new regulations have changed that completely. Now, a new mechanism prevents heirs from being penalized if an investor passes away. If an investor dies, the investment passes on to children (or other heirs) allowing them all the benefits of the original QOF investment.

A new mechanism prevents heirs from being penalized if an investor passes away.

Opportunity Zones Investment with CXRE

Ready to invest in Opportunity Zones, but don’t know where to start? Let CXRE’s team of commercial real estate estate professionals get you started. We can tell you more about commercial real estate tax breaks for Opportunity Zone investments. Contact us today to learn more about investment opportunities in Houston and other cities.

Further Reading:

CXRE Insight: 3 Things You Don’t Know About Houston’s Opportunity Zones — CXRE Group

CXRE Insight: Real Estate Investors Eye Opportunity Zones in Houston

IRS FAQ’s on Opportunity Zones

IRS Updated Opportunity Zone Regulations

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