Tax Alert: Carve Out for Vacant Opportunity Zone Properties Stimulates Real Estate Investments

Key Points:

  1. More properties given expected COVID vacancies could now present an accelerated and less costly strategy for Opportunity Zone (OZ) investors in qualified real estate and businesses (QOZBs).
  2. The Treasury Department affirms a special carve-out for a vacant property allowing investors with qualified capital gains to potentially bypass the substantial improvements requirement on existing properties.
  3. This provision could potentially save QZ investors valuable development time, millions in development costs, and help deliver many more successful OZ projects in local communities.
  4. Initial OZ regulations required existing buildings and/or businesses located in a qualifying zone to add 100% improvement of original building cost basis over approximately 30-60 months.
  5. So what changes since the Initial OZ regulations?…
    a.)The “vacancy” description and related improvements requirements are easier now.
    b.) Prior rules required the OZ property to be vacant for 3 years, however, if the property was vacant in April 2018, now it just has to be vacant for 1 year to qualify as original use and avoid the improvements requirement.
    c.) A property actually doesn’t have to be 100% vacant to qualify, it means that no space more than 20%has been occupied during that time.
    d.) For Example, a 20,000-square-foot commercial property or mixed-use apartment complex with residential units or some retail space that had not been rented out taking up more than 4,000 square feet, is now technically a “vacant building” for OZ purposes.
    e.) Since the building is now considered vacant under the new regs and in a designated Opportunity Zone geography, it can be purchased by an Opportunity Zone Fund investor and qualify without any additional “substantial improvement” requirements.
  6. “These are excellent strategies and extended timelines available for the OZ investor and real estate overall making some projects far more appealing” noted Michael F. D’Onofrio, Managing Director with Engineered Tax Services. “Let’s remember that the IRS also recently extended the deadline to close on an OZ project to mid-July together with the tax return extension overall. Combined with the CARES Act in March that also increased the annual loss limitations for increased utilization, added the new 5yr loss carryback options for potential refunds out of retroactive years to increase cashflow; and corrected the (QIP) Qualified Improvements Property for additional immediate write-offs with 100% Bonus Depreciation that can be all comprehensively captured and amplified by a cost segregation study and capturing any related 179D or 45L energy tax credits…there’s much to do right now and before the end of 2020.”
  7. “On top of all that there’s still also the 26% Federal ITC (Investment Tax Credit) in 2020 for renewable energy solar systems as well as the Historic Tax Credits (HTC) should all be considered and maximized together where possible for amazing opportunity zone projects.” Michael added, “We are assisting many clients with innovative and comprehensive project structuring, attracting capital investments, maximizing wealth preservation and tax mitigation.”

Let us know if you have questions on this new guidance, need help with your opportunity zone project or CARES Act specialty tax strategy assistance.

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Heidi Henderson

Heidi Henderson

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