Will I Get Opportunity Zone Tax Benefits for a Brownfield Investment?

8/26/2019

The quick answer is: “You most likely will, but the IRS is still clarifying standards.”

You may recall that the opportunity zone program has established low-income communities in need of outside investment that are certified as qualified opportunity zones by the Treasury Department. Taxpayers realizing capital gains can defer their tax obligations on those gains if they invest them within 180 days into a qualified opportunity fund (QOF). The goals of the opportunity zone and brownfield programs overlap substantially. Brownfields exist disproportionately in economically depressed and low-income areas, including many communities that have been designated as qualified opportunity zones. Redevelopment of brownfields can thus be an important step in revitalizing opportunity zone communities. And if the opportunity zone tax benefits can be realized by investors who assess and cleanup potentially contaminated sites, the environmental goals of the brownfield program would be promoted as well.

One of the most important criteria for a QOF is for it to “substantially improve” the property by investing an amount equal to at least 100% of the cost basis (i.e., purchase price) of the property over a 30-month period. Consequently, EPA has asked the IRS:

To extend the 30-month period for substantial improvement, due to site assessment and remediation timeframes that can be significantly longer;
To specifically include site assessment and remediation in the definition of substantial improvement; and
To clarify how the substantial improvement test would apply to contaminated raw land, because the regulations had reasoned that excluding the cost basis of land from the substantially improved calculation would facilitate repurposing vacant buildings.

As a brownfield investor, I’m proceeding with the assumption that these issues will get resolved to my benefit. I am optimistic that regulators will wholeheartedly agree to the enormous synergistic potential between opportunity zones and brownfields. The consensus among those in-the-know seems to be: “Why wouldn’t cleanup costs be covered en route to an immediate vertical development?!”

Of course, this topic is extremely complicated, and I’d be remiss without the disclaimer that all investors should consult with their local legal and tax professionals. And before you call these professionals, here are some recent articles about the opportunity zone and brownfield overlap: