IRS Lays Out Final Rules on Opportunity Zones

On Thursday, December 19, 2019, the Internal Revenue Service (“IRS”) and the U.S. Department of the Treasury issued a final set of highly anticipated and hoped for regulations regarding the Qualified Opportunity Zone Program (the “QOZ Program”). The QOZ Program, implemented as part of the Tax Cuts and Jobs Act of 2017, allows investors to defer and eventually reduce capital gains taxes on their profits from securities, real estate and other assets by investing those funds into projects in designated low-income census tracts across the country (referred to as “Qualified Opportunity Zones”).

The final regulations are nearly 500 pages long, and address the comments received in response to the two notices of proposed rulemaking issued under Section 1400Z-2: the proposed rules issued in October 2018 (dealing mainly with real estate investments) and the April 2019 guidance (dealing primarily with how the tax breaks work for operating businesses). The final regulations also provide additional guidance for taxpayers eligible to elect to temporarily defer the inclusion in gross income of certain gains if corresponding amounts are invested in certain equity interests in Qualified Opportunity Zone Funds (“QOFs”), as well as guidance on the ability of such taxpayers to exclude from gross income the appreciation on their investment if they hold the investment for a minimum of 10 years.

In addition, the guidance addresses various requirements that must be met for an entity to qualify as a QOF and, if the QOF invests in an operating subsidiary, requirements for that subsidiary to qualify as a Qualified Opportunity Zone Business (“QOZB”). It also provides clarification on a variety of issues that remained unclear after the issuance of the proposed regulations, including the QOF’s ability to reinvest proceeds received from investment in, or the sale of, qualified opportunity zone property, land banking, consolidated return filings for QOFs that were formed as C corporations, the applicability of reasonable cause to penalties imposed on QOFs for failure to satisfy the 90% asset test, to name a few. The regulations also provide for an additional 62 months for start-up businesses to qualify for the program, and clarify that there are no current or proposed plans to reopen consideration of additional census tracts to be designated as QOZs.

CSG’s Qualified Opportunity Zone Group is closely reviewing this final set of regulations, and will provide an updated and more detailed summary of the rules shortly. In the meantime, CSG stands ready to assist you and answer any questions you may have concerning existing or potential investments in QOFs.