The Trump administration released the first draft rules for an ambitious plan to provide tax breaks for investment in economically disadvantaged areas labeled “opportunity zones’” on Friday, and real estate appeared to be the big winner.
“We want all Americans to experience the dynamic opportunities being generated by President Trump’s economic policies,” said Treasury Secretary Steven Mnuchin in a press release heralding the new rules Friday. “We anticipate that $100 billion in private capital will be dedicated towards creating jobs and economic development in Opportunity Zones.”
Not everyone is sure how effective the policy will be in improving outcomes for lower income Americans, in part because it’s a new policy intended to work over decades. But it's one of the parts of the tax overhaul signed by President Trump in December that does enjoy bipartisan support.
The opportunity zones work by giving preferential treatment to capital gains on investments in distressed areas, which are designated by state governors and signed off on by the Treasury. Investments made for longer are given more of a break from the capital gains tax. The rules released Friday are set boundaries on which kinds of investments qualify.
Groups supportive of the new tax investment break praised the administration’s work, while emphasizing that the success of the provision will hing on the details in what was proposed Friday, as well as a future rulemaking promised by the Treasury Department and Internal Revenue Service later this year.
“This is not a complete effort,” said John Lettieri, head of the Economic Innovation Group, a nonprofit that leads a business coalition supportive of opportunity zones. “The first tranche [of rulemaking] is meant to address, as we understand it, some of the low-hanging fruit.”
One key rule is that, to qualify for the tax break, a business or property investment generally must be at least 70 percent in a zone, and a fund that seeks to take advantage of the tax break needs to be 90 percent invested in opportunity zones.
That ultimately means a little less than two-thirds of the capital of an investment fund could go toward opportunity zone projects while still qualifying for the break.
The universe of firms and industries that could potentially benefit is relatively wide, but the real estate industry seems a clear winner. Developers worried that gains, which were loosely defined by Congress, might not include profits from real estate sales. But the proposed guidance allows for reinvestment of all capital gains, including real estate.
“There’s a lot more flexibility than what people originally anticipated,” said Aron Betru, managing director for the Center for Financial Markets at the Milken Institute, an economic policy think tank.
Brett Theodos, a policy researcher at the Urban Institute, agreed.
“That I think is going to be a pretty big deal in terms of opening the aperture of capital that can be invested," he said.
The proposed rule also allows breaks for property improvement in qualified areas, which were again written to favor real estate investment. To qualify for a benefit, the improvement must be deemed to cost the same amount as the property it improves, but the cost of the land will not go toward that figure, substantially lowering the amount of money necessary to receive a tax benefit.
Rules specific to vacant property will come in a later proposal.
Another important detail yet to come: how the projects and benefits will be tracked. It’s a vital consideration in preventing abuse of the program, as well as measuring the effectiveness of a brand new tax benefit with a 30-year life.
“I think collecting data is going to be really critical,” said Betru.
That reporting issue, as well as other potential in-the-weeds details of Friday’s proposed rules, made business groups hold off from sweeping proclamations. As is standard, rulemakers solicited input from industry and other stakeholders on the proposal, leaving room for changes to be made when the final rules come out.
“I don’t want to declare victory yet because there’s a lot of things left that can and should be done,” said Lettieri.