The second round, released in early 2019, included one that may have profound implications for investors' estates, Pappachristou said.
“The 2019 regulations state that heirs will no longer be penalized in the event the investor dies," he said. "In other words, they will receive the benefits from the original qualified opportunity fund investment.”
He said another clarification in the second round affected qualifying businesses, which socially responsible investors in particular might appreciate. The new regulations require funds to have meaningful roots in the communities they develop or redevelop by requiring fund personnel to physically work in the zone at least 50% of the hours they are employed there.
Kapyrin said the most recent round of Treasury Department Opportunity Zone regulations, released last month, expanded the definition of vacant property in qualified opportunity zones that include unused or brownfield urban spaces.
“The changes ... enhance this program as a way to increase investment in blighted and underutilized urban areas,” he said.
For example, Kapyrin said, investors may now use gross gains to report a Section 1231 gain from the sale of property, even if they have Section 1231 losses for the year.
When not applied to an Opportunity Zone investment, a Section 1231 gain from the sale of property is taxed at the lower capital gains tax rate, as opposed to the rate for ordinary income. If the sold property was held for less than one year, the 1231 gain would not apply at all.
“This increases the potential pool of investors that would be interested in QOZ investing,” Kapyrin said.
He believes such clarification in the program may even push more socially conscious investors into becoming opportunity zone participants, another side benefit of the latest regulations.
“Impact investing … can be done profitably, [and] QOFs are one way to do it,” Kapyrin said.
But Pappachristou maintained that just because somebody is a socially responsible or impact investor, that does not mean investing in a qualified opportunity zone fund is necessarily right for them.
“There are several factors that need to be considered, such as net worth, the need for liquidity and regulatory or investment risk,” he said.
Both men emphasized how important due diligence is for anyone contemplating an investment in a qualified opportunity zone fund, whether they seek to do good or do well.
“We recommend that an investor discuss whether a qualified opportunity zone investment is appropriate for them with their financial advisor and tax professional,” Pappachristou said. “Depending on the scenario, there may be other tax planning strategies that make more sense for a particular client.”