Despite the rancor and polarization in Washington, D.C. these days, there is good news coming out of the nation’s capital. The following two issues show that positive developments can still happen to encourage economic development and protect property rights.
Qualified Opportunity Zones
The Qualified Opportunity Zones (“QOZ”) program was enacted in the 2017 Tax Cuts and Jobs Act to encourage economic growth in underserved communities through tax incentives for investors. Along with those tax benefits, it presents opportunities for real estate investment and development in those communities. American states and territories, including Washington, D.C., nominated areas (by census tract) to be designated as QOZs in 2018, and the IRS and Treasury finalized the designations that year. This temporary program (set to expire on December 31, 2047) presents opportunities for real estate investment and development in distressed communities. There are several potential tax benefits to investors who invest in a QOZ, if all requirements are met:
- First, capital gains reinvested (within 180 days of a sale to a nonrelated person) into a QOZ are tax-free as long as they are held in the program, through 2026.
- If held for five years, the tax ultimately paid on the reinvested gains is reduced by 10%; if held for seven years, that reduction is increased to 15%.
- In addition, gains accrued on deferred gains funds while invested in a QOZ are tax-free if they are held for at least ten years.
Investments in “Opportunity Funds” (O Funds) may be gains from a previous sale (within 180 days) and/or non-gains funds, but only reinvested capital gains are eligible for the tax benefits. If both gains and non-gains funds are invested, they are treated as separate investments and will receive different tax treatments.
- To qualify for the tax benefits, investments into a QOZ must be made through an O Fund, which may be a partnership or corporation organized for the purpose of investing in QOZ property. The requirements for an O Fund are:
- Must hold at least 90% of the assets in QOZ property (which can be stock, partnership interests, and/or tangible property used in a trade or business within a QOZ, such as real estate);
- Must certify with the Treasury and IRS, via a self-certification filed with federal tax returns (Form 8996).
Finally, the “QOZ business property” that an O Fund invests in must be “substantially all” in a QOZ, which under the proposed rules is met if 70% or more of the property is in a QOZ. The statute also requires that after an O Fund acquires QOZ business property that it be either “original use” (new) or “substantially improved,” which means investing at least as much on the improvement as was paid for the used asset. “Original use” commences with depreciation, so an unfinished asset purchase by an O Fund in a QOZ can qualify for original use as long as it has not been depreciated yet. In addition, vacant or abandoned property can be considered original use if it has been in that state for at least five years. The proposed rules state that the basis of the land a business sits on does not need to be included for the substantial improvement requirement, thus reducing the required investment amounts.
On December 12, 2018, the White House issued an Executive Order establishing the White House Opportunity and Revitalization Council, chaired by Housing and Urban Development (HUD) Secretary Ben Carson and comprised of 13 Federal agencies. The Council will focus on ways to revitalize low-income communities, through streamlining coordinating existing Federal programs to economically distressed areas, including Opportunity Zones. In May 2019, U.S. Department of Housing and Urban Development (HUD) released a notice that it will be offering new incentives for multifamily property owners to invest in Opportunity Zones.
Knick v. Scott Township, PA Supreme Court Case
The Supreme Court of the United States (SCOTUS) issued a landmark property rights decision on June 21, ruling that the federal courts are open to decide landowners’ claims for a Fifth Amendment “taking” of property by local regulatory agencies. In Knick v. Township of Scott, the nation’s highest court reversed a 1985 precedent that had forced property owners to first bring takings lawsuits in state courts, which acted as “gatekeepers” to block the claims from ultimately getting to federal court.
The 5-4 ruling in Knick holds that suits arising under the Takings Clause can be brought as an initial matter in U.S. trial courts, and then appealed as of right in U.S. circuit courts – just like any other alleged grievance to vindicate protections in the Constitution’s Bill of Rights. Such matters are no longer relegated to state judges for resolution. Federal courts are now proper venues to test the constitutionality of aggressive land-use decisions by local regulators, and can decide whether landowners are owed “just compensation” for a property taking.
Chief Justice Roberts’s majority opinion corrected the litigation dilemma for property owners trapped between the state and federal judiciaries. “The takings plaintiff thus finds himself in a Catch-22: He cannot go to federal court without going to state court first; but if he goes to state court and loses, his claim will be barred in federal court,” Roberts wrote. “The federal claim dies aborning.”
Roberts added, “Takings claims against local governments should be handled the same as other claims under the Bill of Rights. We now conclude that the state litigation requirement imposes an unjustifiable burden on takings plaintiffs, conflicts with the rest of our takings jurisprudence, and must be overruled.” The attorney representing the property owners before SCOTUS remarked that Knick “reject[s] barriers that unfairly deny property owners their day in court [and] sends a message that property rights are just as sacred as all other rights.”
About the Author: Russell Riggs is a Senior Policy Representative with the National Association of Realtors in Washington, DC. For the past 23 years, Russell has advocated on behalf of Realtors on energy, environment, property rights, immigration and natural resource issues before Congress and federal regulatory agencies.
Russell also serves as the Advocacy Liaison to the REALTORS Land Institute, NAR‘s Global and Business Affairs Group, and NAR’s Resort and Second Home Group. Prior to his position with NAR, Russell held positions with the U.S. Department of Energy, the Council of State Governments, the National Governors Association and the New Jersey Department of Environmental Protection. Russell holds a Bachelors degree from Virginia Commonwealth University, and Masters Degrees from Tufts University and New York University.