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How do the second set of regulations establish anti-abuse rules when it comes to land use in an Opportunity Zone?

How to the new regs tackle land-banking to prevent tax fraud?


Answers
  • Peter McNeil
    September 23, 2019

    Basically land that is not effectively connected to qualified tangible property is not qualified property. If a real estate parcel is acquired and part of the land is separate from the building or other improved asset, that land would be excluded. An example would be land that is separated by a highway. There is no access to this land and that land does not provide additional utility to building or other asset. Converting land to a parking lot or storage site for an OZ business or asset would qualify the land. The detached land must provide some economic benefit for the qualified asset or Opportunity Zone business.

  • Jonathan McGuire
    August 27, 2019

    The key to this is that the QOZ business must operate as a bona fide trade or business. If the activities do not rise to a level of a trade or business, that income will be recast as investment income not eligible for the tax benefits. At least 50% of your income must be earned inside a zone from a trade or business.

  • John (Jack) Wegmann
    August 31, 2019

    Land can be treated as QOZB property only if it is used in a trade or business of a QOF or QOZB. The holding of land for investment purposes does not give rise to a trade or business. If a significant purpose for acquiring unimproved land was to achieve that inappropriate tax result, the general anti-abuse rule set forth in proposed §1.1400Z2(f)-1(c) would apply to treat the acquisition of the unimproved land as an acquisition of non-qualifying property for section 1400Z-2 purposes.

  • Brad Cohen
    August 27, 2019

    There are lots of details in the regulations of what is allowable.

  • Matt Campbell
    August 28, 2019

    The second set of regulations have not provided any anti-abuse rules yet. The proposed regulations deter land banking by requiring an active trade or business to occur on the land. Having a pay parking lot is a common way I've heard discussed to hold land for a period of time before development. I believe rented farm ground for cultivation should work too.

  • Pat Cardwell
    August 28, 2019

    There are lot of aspects to the regulations which can be considered.

  • Matthew Rappaport
    August 27, 2019

    You can't use the OZ program to speculate about land value. The anti-abuse rules make the "cupcake rule" pretty clear, insofar as you can't build a token structure on valuable land just to qualify it for QOZ tax benefits. Rather, you have to use land and the appurtenant structures in a legitimate trade or business.

  • Shawn Neidorf
    August 27, 2019

    Stayed tuned. The second round of guidance says we'll get rules on anti-abuse, but we don't have them yet.

  • Blake Christian
    August 27, 2019

    The regulations do not yet define or give examples of anti-abuse. They also do not provide much guidance on land banking, but the regulations do provide that land which the fund has no plans to improve will generally not qualify as eligible OZ property and may cause the fund to miss the 70% or 90% tests.

  • Maria De Los Angeles Rivera
    August 30, 2019

    The regulations do not go into details of anti-abuse rules. They mention that the land must be used in an active trade or business and not held for investment. It is expected that the last set of regulations will provide more information and these anti-abuse rules.

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