Fortunately, federal officials have pledged to fast-track the rule-making process, which had been delayed for weeks by the government shutdown. The process includes formal responses to questions and suggestions submitted by accountants, tax lawyers, developers, investors, trade associations (including ICSC) and other stakeholders.

At the winter meeting of the United States Conference of Mayors this month in Washington, senior Treasury Department officials promised to issue a second round of draft regulations soon, according to Phillips Hinch, ICSC’s vice president of tax policy. These officials also provided some important real-time clarification: The draft regulations state that businesses located inside Opportunity Zones must derive at least 50 percent of their gross revenues from the “active conduct of trade or business” that occurs within that zone. In reviewing this language, some stakeholders feared that this would disqualify tech startups, office tenants, manufacturers and other businesses likely to sell products or services outside the zone.

“At the conference, Treasury basically said that even if those gross revenues come from outside the zone, the income will still be able to qualify,” Hinch said. This helped reassure the audience that a broad array of businesses — not only mom-and-pop stores with local customers — would qualify for the program.

The incentives apply to low-income census tracts designated by federal officials based on input from state governors. The benefits are attractive because they allow investors in Opportunity Zone funds to deploy unrealized capital gains that would otherwise be taxed upon sale, says Hinch. These reinvestments can be poured into real estate projects or into businesses located in Opportunity Zones. “The idea here is that there are unrealized capital gains in the stock market and elsewhere that could be brought in to encourage development and economic activity in these areas,” Hinch said. “The program has a lot of potential.”

In Real Capital Analytics' December report titled U.S. Opportunity Zones: A Baseline, analysts point to the enormity of unrealized capital gains in this country. “Collectively, the Opportunity Zones account for 10 percent of the investable universe in the U.S. and have averaged $50 billion in annual acquisition volume and $34 billion of commercial construction starts in recent years,” the report says. “While significant, these investment volumes pale in contrast to the estimated $6 trillion of unrealized capital gains eligible for the Opportunity Zone funds.”

Under the latest version of the proposed regulations, investors in qualified Opportunity Zone funds can reduce capital gains taxes by 10 percent for investments held at least five years and by 15 percent for those held for seven years or longer. By investing capital gains into an Opportunity Zone fund within 180 days of realization, investors pay no taxes on that reinvestment until it is sold or exchanged, a deferment that ends Dec. 31, 2026. Last, and perhaps most important, investors will also pay no capital gains on the increased value of Opportunity Zone investments held for at least 10 years, a benefit that will continue to be available through 2047.

The incentives enjoyed bipartisan support when they were signed into law as part of the tax reforms of 2017. But Hinch points out that the provision on Opportunity Zones was a late addition to the bill, and many of the details were left to the Treasury Department to hone through the regulatory process. Timelines written into the legislation, he points out, add urgency to the need for final regulations: Investors that want to qualify for the full 15 percent tax break — the maximum relief available for currently unrealized capital gains — face a year-end deadline for reinvesting those gains into Opportunity Zone funds. 

Said Hinch: “The clock is ticking.”