New Trump Tax Shelter Needs More Detail, Experts Warn
In a letter sent to the U.S Treasury and the IRS late last month, a working group of accountants asked for more guidance about the new tax-sheltering Opportunity Zones regulations. The group also warned federal agencies that investors will not flock to the Zones unless they learn more from the government about the details of those regulations.
In October of this year, under a law established by President Donald Trump’s 2017 Tax Cuts and Jobs Act, the Treasury designated some 8,700 census tracts nationwide as economically distressed “Opportunity Zones” and gave its initial guidance about how investors can avoid capital gains taxes by buying stakes in those geographic regions.
Under the new program, if investors make long-term investments in the designated Zones before the deadline, they can reap significant tax benefits. Specifically, if within 180 days of realizing capital gains on other investments – such as stock or real estate profits – investors redeploy those assets by putting them into a qualified fund that invests in businesses or real estate in one of the zones, and then substantially improve upon those assets in the zone, they can defer paying taxes on the reinvested capital gains for as many as seven years. Additionally, under the new law, they then pay taxes on only 85% of the reinvested capital gains. Most significantly, if investors keep their stakes in a Zone for 10 years, they will incur no tax on the additional capital gains they realize when they sell those assets. One financial advisor has called the program a “Roth IRA for the rich.”
But in its Nov. 26 letter, the working group, formed by Novogradac, a San Francisco-based national professional services organization of accountants, told the IRS that its guidance so far is insufficient and a number of unanswered questions remain. “Taxpayer uncertainty around these issues is hindering investment in opportunity zones,” the letter reads.
Already, investors, real estate developers and asset managers are scouring maps and demographic information about the Zones scattered nationwide. And many property owners, community members, local government officials and other stakeholders with interests in those same tracts are hoping their neighborhoods will become magnets for tax shelter-seeking investors.
In its letter, the working groups requested guidance on:
- whether cash reserves held by an opportunity fund designated for investment in qualified Zone property are considered OZ property
- whether gains realized by an opportunity fund for the sale or exchange of Zone property can be deferred if reinvested in replacement Zone property within 12 months of the sale or exchange
- whether vacant land qualifies as Zone business property and whether substantial improvements made after Dec. 31, 2017 to property purchased before that date can be considered separate Zone business property.
But even with those questions pending, asset managers are already developing funds.
A roster of 40 “Opportunity Zone” funds have already announced plans to raise a total of more than $800 billion, according to Novogradac. Widely reported is Anthony “The Mooch” Scaramucci’s hedge fund SkyBridge Capital's plans to launch an Opportunity Zone fund by the end of the year, which would aim to raise $3 billion from investors.
There exists some $6.7 trillion in unrealized capital gains among investors in this country, according to Treasury Department estimates. That means a lot of potential for Opportunity Zone fund managers and for locals in the Zones.