by Scot Patrick O’Brien, Office Managing Partner, Akerman LLP; Alexandre M. Denault, Partner (Tax Practice Group), Akerman LLP
The Tax Cuts and Jobs Act signed into law on December 22, 2017 created a new capital gains deferral and exemption for taxpayers who make long-term investments in low-income rural and urban communities that have been designated by the Treasury Department as “opportunity zones.”
In the fall of 2018, this magazine reported on the decline in the amounts of EB-5 capital raised due to visa backlogs and noted how opportunity zones may provide a new source of capital for new and existing EB-5 projects. October 2018 RCBJ, Vol. 6, Issue #2. In the meantime, on October 19, 2018, the Internal Revenue Service (IRS) released proposed regulations (Proposed Regulations) concerning the qualified opportunity zone program (QOZ Program). Contemporaneously with the issuance of the Proposed Regulations, the IRS released a Revenue Ruling (Revenue Ruling 2018-29) addressing the application of the “original use” requirement and the “substantial improvement” requirement – two fundamental tests for real property in the QOZ Program. As discussed below, on February 14, 2019, the IRS held a public hearing on the Proposed Regulations. It is anticipated that additional proposed regulations, as well as final regulations, will be issued in relatively short order.
This article provides an overview of the Proposed Regulations and highlights the impact of certain Proposed Regulations, if adopted in their current proposed form, on opportunity zone fund investments in EB-5 projects.
This article also addresses how investments from qualified opportunity zone funds can be made into new EB-5 projects and how investments from EB-5 new commercial enterprises can be made into qualified opportunity zones provided certain conditions are satisfied. Those conditions include that the qualified opportunity zone fund contributes cash into the newly formed entity such as a limited liability company (LLC) and the LLC qualifies as a qualified opportunity zone business, as discussed below.