Qualified Opportunity Zones: New Regulations Released

Apr 18, 2019

Opportunity Zones are a new community development program established by Congress in the Tax Cuts and Jobs Act of 2017. The goal of Opportunity Zones is to encourage long-term investments, specifically in low-income urban and rural areas throughout the country, by providing taxpayers with potential tax benefits including deferring capital gains taxes until 2026, cutting up to 15% on those taxes, and eliminating capital gains taxes altogether on investments held for at least 10 years.
 
Certain qualifications have been unclear, but on Wednesday the Internal Revenue Service issued proposed regulations to clarify technical rules governing investments in qualified opportunity zones (QOZ). Treasury Secretary Steven T. Mnuchin said that the new guidance “will foster economic revitalization, create jobs, and spur economic growth that will move these communities forward and create a brighter future.”
 
The proposed regulations provide, among other things, clarity on treatment of gains on long-term investments, ownership and operation of the business, and the definition of qualified opportunity zone business property. 
 
Under the proposed regulations “substantially all” - relevant for the holding period requirement and the use of the tangible business property - means that at least 70% of the property must be used in a QOZ; tangible property must be qualified opportunity zone business property for at least 90% of the holding period; and the entity must be a qualified opportunity zone business for at least 90% of the opportunity fund’s holding period.
 
Another point of clarification concerns the “50%” rule governing operating businesses. Under Wednesday’s rules a business can qualify if 50% of its employees’ hours or wages are in the zone. A business can also qualify if property and managers needed to produce 50% of the revenue are in the zone or 50% of the revenue is generated in the zone.
 
Under the newly-proposed rules funds would have 12 months to reinvest proceeds into new investments. However, there are situations where deferred gains may become taxable if an investor transfers their interest in a QOF by gift, for example. Inheritance by a surviving spouse is not a taxable transfer, nor is a transfer of ownership in a QOF interest upon death to an estate or a revocable trust that becomes irrevocable upon death.