LEGISLATIVE AFFAIRS: Proposed Rules Released for Opportunity Zones

Philip Weiden | November 2018

November Legislative Update:

On Oct. 19th, the Treasury Department released its proposed rules for Qualified Opportunity Zones, a federal program created by the Tax Cuts and Jobs Act passed in December of 2017. The program incentivizes investment and development in distressed communities, designated as “Qualified Opportunity Zones” through tax benefits for investors. These benefits include deferral of federal capital gains tax on qualified capital gains reinvested into a QOZ (via an “Opportunity Fund”), and potential reduction in the tax ultimately paid on those gains (if held for five years they receive a step-up in basis of 10%; if held for seven years, 15%).

In addition, gains accrued on investments while in an Opportunity Fund and invested into a QOZ may be exempted from federal capital gains tax, if the investments are from a proper deferral election (reinvested capital gains that the tax is deferred on) and held for at least 10 years. The proposed rules provide important clarifications for interested investors, including the type of gains eligible for tax deferral (capital only), how investments into Opportunity Funds consisting of both capital gains proceeds and non-gains funds are treated, the overall timeline for the program, how to certify an Opportunity Fund and meet the “90% asset requirement” (90% of a fund’s assets be held in a QOZ), and how they will determine that an Opportunity Fund has “substantially improved” a QOZ business property.

Further proposed rules are expected on other aspects of the program, and the IRS will hold a hearing on the issue on Jan. 10, 2019.

NAR: Keep Rental Deduction Simple

“The new deduction for qualified business income included in last year’s tax reform act should be simplified and made easily available to the 10 million Americans who report income from rental real estate.”

That was the main message delivered earlier this month by Iona Harrison, a Realtor from Upper Marlboro, MD, in testimony given at a public hearing held by the Internal Revenue Service.

Harrison was referring to requirements outlined in proposed rules released in August requiring owners of rental real estate to determine whether their rental activity rises to the level of a “trade or business” under Section 162 of the Internal Revenue Code in order to claim the deduction.

“When I read this requirement, I am confused. And I can tell you that the vast majority of my fellow property owners are also going to think this is way less than clear. Even many seasoned tax professionals do not understand the distinction between a ‘trade or businesses’ and real estate that is held as a productive investment,” she asserted.

To solve the problem, NAR recommended to the IRS that all real estate rentals be considered as meeting the “trade or business” requirements for purposes of claiming the deduction.

The stakes are high for the estimated 40% of NAR members who own rental real estate, as the deduction can reach as high as 20% of the net rental income earned from the property.

Water Infrastructure Bill Passes Congress

A NAR-supported, bi-partisan water infrastructure bill is headed to President Trump’s desk after the Senate voted to pass it 99-1 on Oct. 10.

S. 3021, “America’s Water Infrastructure Act,” would authorize numerous port revitalization, flood control, drinking water and water storage projects. The bill was the result of weeks of negotiations after initial water infrastructure legislation stalled. Members of the Senate Environment and Public Works Committee, who shepherded the legislation through Congress, celebrated the overwhelming vote.

Committee ranking member Tom Carper (D-DE.) said the bill “delivers for families in every state across our country and I’m proud that it’s on its way to be signed into law.”

“This legislation invests in the critical water infrastructure we don’t see every day, but that American families in every state rely on, such as drinking water systems, dams, reservoirs, levees, and ports,” he said.

Philip Weiden
Legislative Affairs columnist Philip Weiden is the Government Affairs Director for the Hudson Gateway Association of Realtors.