Multi-asset fund managers in the Opportunity Zone space are having trouble attracting investors because of the lack of clarity in the U.S. Treasury's proposed regulations, according to multiple stakeholders testifying at a July 9 IRS hearing scheduled to let the public comment on the rules before the agencies finalize them.

“Multi-asset funds are facing slower fundraising than they expected,” Steve Glickman, the founder and CEO of Develop LLC, an independent advisory firm dedicated to building and supporting Opportunity Zone Funds.

OZ funds, about which FA-IQ has written extensively, became possible after President Donald Trump signed the Tax Cuts and Jobs Act of 2017.

With that legislation, Congress identified capital gains tax relief as a carrot to lead investors to buy stakes in economically-neglected U.S. neighborhoods. The Treasury then approved some 8,700 census tracts located in all 50 states as economically disadvantaged enough to become Opportunity Zones.

Under the program, investors can defer capital gains taxes — and even avoid some entirely — if they deploy their recently-realized capital gains to buy stakes for the long haul in the designated tracts. To achieve the maximum tax benefits, investors are required to make a 10-year commitment.

“Some investors are sitting on the sidelines,” Glickman told the panel of IRS and Treasury officials this week.

“I have talked to many investors, and many fund managers who are having trouble confirming to investors that they can make individual sales,” of assets within the 10-year period to then reinvest in the Opportunity Zone.

When she testified, Regina Staudacher, a corporate tax attorney with Royal Oak, Mich.-based Howard & Howard, agreed the Treasury regulations needed to allow for the possibility of “recycling of gains within a 10-year hold period.”

She found “comfort in the spirit of the regulations,” Staudacher told the panel but added, “it’s when we get into the nuances of the rules” that she gets worried — particularly since the IRS is yet to finalize the rules.

“Another three months go by and we’ve lost another year,” she fretted. Her concerns center on “five-to-seven years from sitting in front of a different group of people and they have interpreted the rules differently,” she told the officials.

Others who testified also sought clarity on what transactions Opportunity Zone investors may do within the decade they keep their stake in the economically neglected communities to maximize their tax benefits.

Taxpayers should be allowed to exclude both ordinary and capital gains from the sale of Opportunity Zone property if those transactions represent the disposition of property used in a trade or business, said accountant John Sciarretti of Novogradac & Co., who represented a working group of his professional colleagues focused on the Opportunity Zone program at the hearing.