Opportunity Zone rule change seeks to entice foreign investors

IRS considering new rules for overseas investors who want to reap benefits from the tax program

TRD NATIONAL /
Sep.September 25, 2020 05:50 PM
Charles Rettig, Commissioner of the IRS (Getty)

Charles Rettig, Commissioner of the IRS (Getty)

Potential changes to the rules for Opportunity Zones could soon allow some foreign investors to reap major tax benefits from the program.

The Internal Revenue Service is considering new rules pertaining to foreign investors’ ability to defer capital gains in the Opportunity Zones program. The new regulations could be released in December, according to the White House Office of Management and Budget. The extent of the changes is unclear, but experts predict they will be geared toward giving foreign investors more clarity on their tax liabilities.

Bloomberg Tax first reported the news.

Both Democrats and Republicans have been targeting Opportunity Zones. President Donald Trump claims the initiative has helped uplift Black and Latino communities, while Democratic presidential candidate Joe Biden said he wants to reform the program to ensure it’s being used to help distressed areas.

The program allows developers and property owners to defer or forgo paying capital gains taxes if they invest in one of the 8,700 Opportunity Zone sites throughout the country. After 10 years, an investor or developer can forgo their entire capital gains taxes on their Opportunity Zone investment.

Investors have poured at least $10 billion into Opportunity Zones funds as of March, according to an analysis by accounting firm Novogradac, based on over 600 Opportunity Zones funds tracked. Initially, the government projected that $100 billion of investments would flow into these zones.

The potential rule change comes at a time when some countries are looking to take advantage of low interest rates in the U.S. and invest in commercial real estate. While overall foreign investment dropped by 46 percent to $42.8 billion between July 2019 and June 2020, South Korean investment rose 230 percent to $3.6 billion, according to Real Capital Analytics.

It seems unlikely, however, that any change targeted at foreign investors would have an outsized impact on the program. Only foreign investors — including individual investors or eligible businesses — with capital gains from selling a U.S. business or piece of real estate would qualify. Tax-exempt institutional investors, such as pension funds and endowments, are not eligible.

Foreign investors aren’t currently excluded from participating in Opportunity Zones projects, but there is some uncertainty over how they would be taxed and whether or not they could withhold capital gains, according to Daniel Ryan, a partner at the law firm Sullivan & Worcester in Boston, who is a member of the firm’s Opportunity Zones practice.

“It would be helpful for fund managers [to get more clarity] because they would know what obligations they would have,” said Ryan.

Reid Thomas, chief revenue officer of NES Financial, said his firm has seen very little Opportunity Zone interest from foreign investors. He noted that the Trump administration may be looking for ways to infuse the program with more capital during the remainder of the president’s term.

“The country needs stimulus, and things like Opportunity Zones are a lot less expensive than writing stimulus checks,” said Thomas.

When the program was first enacted in 2017, developers were emphatic that its generous tax breaks would be a windfall for the industry. But enthusiasm dampened when land prices in Opportunity Zones skyrocketed, narrowing the returns for investors. Other developers found it difficult to find projects in low-income or transitional neighborhoods that would pencil out.

A recent study by the Urban Institute also found that the program has not incentivized investors to invest in distressed areas. Instead, it has largely benefited real estate developers who would be building projects in Opportunity Zones even without the added tax breaks.






Related Articles

arrow_forward_ios
Rendering of the project, Richard Paul Richman, Deme Mekras and Elliot Shainberg

Richman plans senior housing on Allapattah Opportunity Zone property

Richman plans senior housing on Allapattah Opportunity Zone property
1550 Northeast Miami Place with Jordan Gimelstein (Credit: DWNTWNRealtyAdvisors,LLC)

Development site in Miami’s A&E District asks $21M

Development site in Miami’s A&E District asks $21M
21440 Biscayne Boulevard and listing broker Jonathan Molano

Opportunity Zone site in Aventura hits market, could trade for $100M, broker says

Opportunity Zone site in Aventura hits market, could trade for $100M, broker says
Alex Zylberglait of Marcus & Millichap and 2020 Northeast 163rd street

Argentine investor nabs North Miami Beach Opportunity Zone property

Argentine investor nabs North Miami Beach Opportunity Zone property
Carlos Rodriguez Sr., Carlos Rodriguez Jr. and a rendering of Home 2/Tru by Hilton

Driftwood, Merrimac close first Opportunity Zone deal in Flagler Village

Driftwood, Merrimac close first Opportunity Zone deal in Flagler Village
2965 West Corporate Lakes Boulevard and Black Creek Group CEO Raj Dhanda (Credit: Google Maps, Blue Vault)

TIAA sells Weston warehouse for $33M

TIAA sells Weston warehouse for $33M
Huizenga lobbied Rick Scott to secure Opportunity Zone designation for West Palm site

Huizenga lobbied Rick Scott to secure Opportunity Zone designation for West Palm site

Huizenga lobbied Rick Scott to secure Opportunity Zone designation for West Palm site
Avra Jain and a rendering of 225 NE 34th Street

Avra Jain plans to benefit from Opportunity Zone for Midtown office building

Avra Jain plans to benefit from Opportunity Zone for Midtown office building
arrow_forward_ios

The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

Loading...