WASHINGTON — In recent weeks, backers of a new tax incentive meant to encourage investment in struggling communities raised alarms with the Trump administration that the regulations could steer most of that money into real estate development, rather than start-up businesses that are more likely to create well-paying jobs.
The rules that the administration released on Wednesday appeared to ease many of those fears.
Under the proposed rules, investors will have several ways to qualify for the Opportunity Zone tax breaks, according to Treasury Department officials. But critics say they could also make it easy for wealthy investors to win tax breaks for development that would have happened anyway.
The rules also set in motion what would be the government’s first effort to track investment in the zones and assess whether it is helping communities as advertised.
“This round of regulations removes some of the most significant impediments keeping capital on the sidelines, especially as it relates to operating businesses,” said John Lettieri, president of the Economic Innovation Group, a Washington research organization that developed and championed the Opportunity Zone concept.
But he said there was still room for improvement in a final version of the rules: “The question is how much further can we go in facilitating investment in new and growing operating businesses.”
The tax incentive promises investors the chance to defer, reduce and in cases where investments are held for more than a decade, eliminate taxes on certain capital gains, provided they invest in Opportunity Zones. These areas were identified by states last year based on criteria that included poverty and income levels. The zones have become a boon for real estate developers and drawn criticism from people who say they will mostly enrich well-heeled investors and speed up the displacement of low-income residents in gentrifying areas.
Champions of the zones say a series of regulations, which the Treasury Department began issuing last year, will determine if the program is successful. One key test many local officials use to evaluate the zones is whether the tax breaks encourage job-creating businesses, not just condos, retail stores, hotels and other real estate projects that often don’t create many permanent jobs with opportunities for advancement.
The rules released on Wednesday, ahead of a White House meeting on the zones, seek to encourage business development in several ways.
They include provisions that will allow investors to qualify for the breaks even if the businesses they fund focus on exported goods or services, or the domestic market outside the zone. Long-vacant properties will immediately qualify for the tax breaks. Investors will be allowed to share their stakes in an Opportunity Fund, which invests in the zones, and to sell, say, a start-up in an Opportunity Zone as long as the money is reinvested in another qualifying business or asset.
“We are pleased to issue guidance that provides greater flexibility for communities and investors as we continue to encourage investment and development in Opportunity Zones,” Treasury Secretary Steven T. Mnuchin said in a news release.