The Treasury Department released a second round of rules clarifying requirements for Opportunity Zones recently in a move designed to encourage more development in low-income areas.
The new rules are intended to make it easier for developers looking to take advantage of the tax breaks promised by investing in Opportunity Zones, and clear up some of the confusion that was holding investors back.
Created by the Tax Cut and Jobs Act of 2017, Opportunity Zones seek to spark economic development in distressed areas by encouraging long-term investments through significant tax breaks.
The tax incentive allows investors to defer or minimize taxes on capital gains and, when the investment is remains in play for more than a decade, eliminate capital gains taxes all together.
More than 8,700 communities that are home to approximately 35 million Americans have been designated as Opportunity Zones.
But investors have been hesitant to dive in, with too many questions lingering about how, exactly, the tax breaks work and what types of developments or businesses could qualify.
While HUD estimates that Opportunity Zones could spur as much as $100 billion a year in investments, evidence suggests this potential is far from being realized.
This new wave of regulation is intended to clear up some of the confusion that has held investors back from taking advantage of the program, despite noted interest in the possibilities it could offer.
The new rules specify that investors can share their stakes in Opportunity Zone funds and are permitted to sell start-ups in these areas so long as they reinvest the funds in other qualifying businesses or assets. And they clarify that real estate investors can lease and refinance their properties.
The Treasury’s new guidance also makes it easier for investors looking to fund small business in these low-income areas by approving tax breaks for those exporting goods and services from outside the zone.
One major investor concern revolved around the previous stipulation that in order to qualify, a business must earn 50% of its gross income inside the zone. This left some wondering how tech companies, which might draw customers from outside the zone, fit in.
Now, the Treasury has clarified that a business qualifies if 50% of its employee’s hours or wagers are from inside the zone, or if the property and managers needed to produce 50% of the revenue are from inside the zone.
Treasury Secretary Steven Mnuchin said the administration hopes this new wave of regulation will boost investor activity in these distressed areas.
“We are pleased to issue guidance that provides greater flexibility for communities and investors as we continue to encourage investment and development in Opportunity Zones,” Mnuchin said in statement. “This incentive will foster economic revitalization, create jobs and spur economic growth that will move these communities forward and create a brighter future.”
You can read the full document of revised Opportunity Zone regulations here.