AH: The recent regulations the Treasury recently released provide further clarification for investors looking to invest in Opportunity Zones. A few of these key takeaways are:

  • Only capital gains are eligible for reinvestment into Opportunity Zones;
  • Investors must hold their investment in an Opportunity Zone fund for the full 10 years to exclude taxable gains on the appreciation of an investment;
  • The substantial improvement clause only requires that investors improve the basis of value of a building; the value of the land is excluded from the substantial improvement requirements;
  • The period to sell the investment in the funds for the 10-year exclusion of the tax on gains was extended to EOY 2047. The last date to make an investment in a Qualified Opportunity Fund (QOF) if EOY 2026, so this now allows for the full 10 years to hold plus a 10-year grace period to exit the asset and reset the basis; and
  • The working capital safe harbor clause clarifies that funds contributed to the QOF can be deployed over a 31-month period as long as there's a written plan of how to invest the capital in accordance with the regulations. For example, if an investor invests in a fund that raised $100 million in capital, we now know there are 31 months to deploy that capital as long as the fund maintains a written plan to invest the capital.

FA: One of the main takeaways relates to the substantial improvement clause. What does this mean for investors?

AH: The original legislation included a “substantial improvement” requirement that acquired assets to be improved by 100% of the acquisition basis without providing any further clarification. Many originally believed this meant that if they spent $5 million on an asset they needed to reinvest another $5 million into the property in order to qualify for the tax benefit, regardless of how the value was attributed to the land or the existing buildings.

The newly released regulations clarified that this substantial improvement amount only applies to the value of the building.

For example, we’ll say a fund purchased an asset for $5 million and the building was worth $1,000,000. In order to meet the substantial improvement requirement, investors would simply need to improve the asset by the $1,000,000 building value. The value of the land is not included. This is an extremely important clarification for investors.

FA: What do financial advisors need to know about Opportunity Zones when advising their clients?

AH: One of the most important aspects that financial advisors need to know is that in order to qualify for the tax benefits investors need to invest capital gains in a QOF and meet the tests required by the regulation. Investors cannot simply purchase an asset in a designated Opportunity Zone and real the tax benefits.

Beyond this, the tax benefits associated with investing in Opportunity Zones are a federal tax policy. Therefore, financial advisors will want to ensure that investors are paying close attention to any state tax laws in addition to the known federal exemptions.

FA: What are the specific tax benefits and what are the regulations required in order to meet the requirements to qualify?

AH: There are three major tax benefits to investing in a Qualified Opportunity Zone Fund: