Revenue Ruling and Opportunity Zones
In conjunction with the proposed regulations released by the Treasury Department and the Internal Revenue Service (“IRS”) on October 19, 2018, a separate Revenue Ruling (Rev. Rul. 2018-29) was released which may be of great interest to owners and prospective purchasers of contaminated properties located in “Opportunity Zones.”
To summarize, the Tax Cuts and Jobs Act created “Opportunity Zones” within economically distressed communities. Pursuant to the program, funds reinvested in “Qualified Opportunity Funds” which invest in businesses and properties located in Opportunity Zones may defer and reduce the capital gains realized from those investments. In addition, capital gains realized after holding a qualified investment for ten (10) years in an Opportunity Zone will result in no taxes being paid on those capital gains.
The Revenue Ruling, titled Special Rules for Capital Gains Invested in Opportunity Zones, provides guidance regarding the requirement under 26 U.S.C. § 1400Z-2(d)(2)(D), which defines qualified opportunity zone business property as tangible property used in a trade or business of a Qualified Opportunity Fund (a “Fund”) if:
(a) such tangible property is purchased by the Fund after December 31, 2017,
(b) the original use of such tangible property commences with the Fund or the Fund substantially improves the tangible property (emphasis added), and
(c) during substantially all of the Fund’s holding period for such tangible property, substantially all of the use of such tangible property is in an Opportunity Zone.
Property is considered “substantially improved” by the Fund only if, during any thirty (30) month period beginning after the date of acquisition of such tangible property, additions to the basis with respect to such tangible property exceed an amount equal to the adjusted basis of such tangible property at the beginning of such 30-month period in the hands of the Fund. In other words, the value of the improvement of the property must equal the original value of the property in order to be deemed substantially improved.
Pursuant to the Revenue Ruling, the “substantial improvement” of a property is limited to the value added to any buildings located on a property, and excludes any value added to the land. The Revenue Ruling includes an example which attributes the value of property between land and buildings located on a property, and holds that measuring substantial improvement to the building does not require that the Fund separately improve the land upon which the building is located.
The above guidance is important to property owners and developers who are interested in purchasing and repurposing contaminated property located in Opportunity Zones, as the assessment of a property’s value between the building and land will ultimately determine the amount of effort and expense that will be required to “substantially improve” a property under the program. The Davis Environmental Law Firm will continue to monitor additional guidance and rules that may be released with respect to opportunity zone business property, and parties interested in learning more about the effect of the Ruling should continue to monitor future developments in this area. A description of how our Firm can assist parties who seek to take advantage of this program is available at the following link (Opportunity Zones). Please feel free to contact us to set up an initial consultation to discuss how we may be able to assist.