Welcome to Financial Advisor IQ
Follow

New Tax Shelter Rules Might Move Forward Too Late Due to Government Shutdown

By Miriam Rozen February 4, 2019

The U.S. Treasury announced last week it had rescheduled for Feb. 14 a public hearing on proposed regulations for its new tax-sheltering Qualified Opportunity Zone program. The hearing had been delayed because of the government shutdown.

The rescheduling may not start the ball moving fast enough for a client of financial advisor James Ray and other investors in similar situations.

Ray, a financial advisor with IHT Wealth Management in Skokie, Ill., with more than $1 billion under management, is “working with a client who recently sold his business,” he says. His client ranks as a likely candidate to seize the options available with the Opportunity Zone program, Ray says. But as long as the clock ticks and the Treasury puts no final regulations on the books, his client’s participation in the program remains at risk, Ray says.

President Donald Trump established the Qualified Opportunity Zone program with his 2017 Tax Cuts and Jobs Act. The program provides a potentially lucrative tax incentive for clients to make long-term investments in 8,700 communities nationwide which the U.S. Treasury and Internal Revenue Service have designated as economically-distressed zones. The program offers investors the potential to defer capital gains taxes — and even avoid some entirely, if they invest for the long haul in the designated communities. To achieve the maximum tax benefits, the investors are required to make a 10-year commitment.

To receive maximum tax sheltering benefits, investors must purchase their stakes by a December 2019 deadline.

The government shutdown, however, triggered a delay in the Treasury finalizing its regulations governing the Qualified Opportunity Zone program. That delay threatens to thwart Ray’s clients and other investors interested in the program, Ray says.

“Without a final regulation it is difficult to ascertain whether the program will meet our client’s short- and long-term objectives,” Ray says. “We view the program as closing a window or a wasting opportunity, wherein the full value of the initial deferral of gain may be eroding with each day that passes without a final regulation,” he says.

Lawmakers who co-sponsored the Opportunity Zone legislation have sent a letter to Treasury Secretary Steven Mnuchin asking for specific regulatory tweaks. In their letter sent in late January, the legislators asked Mnuchin specifically to detail the rules for what the program identifies as Opportunity Zone funds, through which investors buy their stakes in the designated impoverished neighborhoods. The letter, signed by U.S. Senators Cory Booker (D-NJ), Tim Scott (R-SC), five other Senators and nine House members, asks the Treasury Secretary to “ensure adequate time” for Opportunity Zone fund managers to conduct due diligence into their investments in impoverished neighborhoods.

The lawmakers also ask that the final Treasury rules allow for “churn” within the Opportunity Zone funds. Specifically, the lawmakers want the rules to provide investors with the flexibility to buy and sell an Opportunity Zone fund’s assets within the 10-year investment period and still receive the tax sheltering benefits — as long as they stay invested within the fund’s portfolio.

Steven Mnuchin (Getty)

IHT’s Ray welcomes the lawmakers’ proposed tweaks to the regulation — particularly the requested extra time for Opportunity Zone fund managers’ due diligence.

“We recommend that the authorities establish a reasonable timeframe for Qualified Opportunity Zone Funds to make investment decisions that are consistent with normal business practices. The very nature of these transactions is complex, often requires significant planning, and may be delayed for a variety of reasons,” Ray says.