Treasury and IRS Release Long-Awaited Opportunity Zones Regulations
Recently, the Treasury Department and the Internal Revenue Service issued much-anticipated proposed regulations for the newly created Opportunity Zones incentive. The tax incentive, which was created by the 2017 Tax Cuts and Jobs Act to encourage investment in distressed communities – including Indian Country, allows for the deferral of taxes until 2026 on capital gains so long as they are reinvested in designated communities. Many tribal lands are eligible and the incentive can serve as an important tool for growing tribal economies.
The proposed regulations state that Opportunity Funds, which are the vehicles for investment in Opportunity Zones, must be created or organized “under the laws of, one of the 50 States, the District of Columbia, or a U.S. possession.” However, the proposed regulations make no mention of tribes or the ability to charter under tribal laws.
NAFOA is seeking clarification from Treasury/IRS on this issue and others to ensure that tribes can maximize their participation and attract investors.
The regulations also clarify that an Opportunity Fund that invests directly in assets must have 90 percent of its assets be qualifying property. Qualifying property includes an investment into an Opportunity Zone business. An Opportunity Fund business needs only to have “substantially all” of its tangible assets consist of qualifying property, with “substantially all” meaning 70 percent of the business’ tangible assets for the purposes of that section.
NAFOA is working to clarify lease valuations on tribal lands under the definition of "qualifying property."
Type of Gain
The proposed regulations clarify that only capital gains are eligible for deferral under the incentive. They go on to say that the gain must be treated as capital gain for federal income tax purposes and the gain would otherwise be recognized no later than Dec. 31, 2026.
Additionally, for capital gains experienced by a partnership, the rules allow either a partnership or its partners to elect deferral. Similar rules apply to S corporations and their shareholders, as well as estates and trusts and their beneficiaries.
Per the regulations, investors have 180 days from the sale of their stock or business to put the proceeds into an Opportunity Fund to qualify for the tax breaks. The capital gains taxes on those proceeds are deferred until 2026, or until they are withdrawn from the fund, and could be reduced by as much as 15 percent after seven years. Investors can avoid capital gains taxes completely on any appreciation of the Opportunity Fund if they hold the investments for at least ten years.
Treasury expects to release more regulations by the end of the year on a range of issues, including the treatment of business operations since some functions will likely occur outside of the designated Opportunity Zones boundaries.
NAFOA is planning to submit comments within the 60-day comment period, so if your tribe or organization is interested in submitting comments or have questions about Opportunity Zones, please contact Dante Desiderio at firstname.lastname@example.org or (202) 631-2003.