It’s an important moment for Opportunity Zones (OZs).
On the one hand, the program has the potential to become a significant player in the economic recovery of communities hit hardest by the coming recession.
On the other, a lack of guidance and relief from the IRS might stifle the impact of these new opportunities. Regulators should act now to ensure we avoid limiting the benefits of OZs right when they are needed more than ever.
Where OZs Stand: More Investment, More Uncertainty
The sell-off on Wall Street in recent weeks, while undoubtedly difficult, may very well prove to be a driver for OZ investments.
Why? Because, presumably, people sold at a gain — in droves — and, given the suddenness of the pandemic, didn’t have a plan in place to deal with capital gains taxes. OZs, which allow those who invest in qualified areas within 180 days to defer those taxes, might be extra appealing now — especially as many seek to put their money in the safe, countercyclical investments OZs can offer (e.g., affordable housing, assisted living facilities, etc.), while also having a tangible social impact.
Yet, at the same time, OZ stakeholders have never faced more uncertainty. Most construction has been suspended. Local housing authorities, who approve building permits, are now shut down or required to work remotely. Getting documents notarized has perhaps never been more challenging.
Without regulatory clarification from the IRS, these delays may result in penalties for failing to meet various incentive deadlines — which may, in turn, dissuade new investors from joining in.
Those newcomers may also need more than 180 days to decide where to invest their gains. Given the rampant uncertainty brought on by social distancing and widespread economic disruption, it may not be beneficial to invest in projects before some modicum of normality returns and the dust settles. Doing so beforehand may only end up hurting the very communities the program is designed to help.
IRS Can Help Untap OZ Potential and Spur Economic Recovery
With explicit guidance from the IRS — as pressed for in a recent letter from the Economic Innovation Group — existing projects can move forward, and new ones can form, without fear of penalty or disarray.
Key players are ready to make this work. For instance, many of the leading OZ strategists, developers, and local policymakers across the U.S. are now being charged with enacting preventative measures to stimulate local economies.
The collaborative nature of OZ efforts, which have solidified cross-sector partnerships and expanded networks nationwide, will serve as essential foundations for these new initiatives. This is especially true if investors utilize specialty financial administration resources purpose-built specifically to support the complex and rapidly changing regulatory and reporting environments for unique funds such as OZs.
Plus, in recent years, OZs have injected new life into rural towns like Brookville, Ind.; built affordable housing in places like Frederick, Md.; business infrastructure in Saco, Maine; and college campuses in Tuscaloosa, Ala., to name just a few.
The IRS has rightly delayed filings of tax returns. There’s no reason why they shouldn’t be able to delay deadlines and provide some direction for OZ funds, which have the potential to play a crucial role in helping America’s most distressed communities recover from the coming recession.
Reid Thomas is executive vice president and general manager of NES Financial’s Specialty Financial Administration, focusing on technology-enabled EB-5, 1031, and Opportunity Zone fund administration.
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