Client Alert: US Treasury Releases Proposed Regulations re Opportunity Zones, Qualified Opportunity Funds

October 26, 2018

On Friday, October 19 the United States Department of the Treasury released (i) proposed regulations related to investment in Qualified Opportunity Zones and Qualified Opportunity Funds (“QOF”) and (ii) Revenue Ruling 2018-29 related to the “original use” and “substantial improvement” requirements with respect to acquired real estate, including land. The issuance of these highly anticipated regulations and Revenue Ruling should provide actionable guidance to many investors, Qualified Opportunity Fund managers, and project sponsors involved in real estate, venture capital, operating business, and project finance in Qualified Opportunity Zones.

Kutak Rock, a national leader in tax-incentivized financing and investment, is working diligently to assist clients with this new tax incentive. We are monitoring developments related to Opportunity Zones and will keep you informed of these developments and provide our analysis via client alert mailings and postings on our website and LinkedIn Company Page.

Background

Opportunity Zones, created by the 2017 Tax Cuts and Jobs Act, were designed to spur investment in distressed communities throughout the country through tax benefits. Section 1400Z-2, in conjunction with section 1400Z-1, seeks to encourage economic growth and investment in designated distressed communities (Qualified Opportunity Zones) by providing Federal income tax benefits to taxpayers who invest in operating businesses, including real estate projects, located within these zones. Section 1400Z-2 provides three main tax incentives to encourage investment in Qualified Opportunity Zones:

  • it allows for the deferral of taxes on capital gains to the extent that such capital gains, or portion thereof, are reinvested in a QOF;
  • permanent elimination of taxes on a portion of capital gains to the extent such capital gains remain invested in a QOF for specified periods of time; and
  • eliminates taxes on the post-acquisition appreciation on investments in QOFs that are held for at least 10 years.

Proposed Regulations and Revenue Ruling, in Brief

The proposed regulations and Revenue Ruling provide clarification in several key areas, including:

  • that only “capital” gains are eligible for deferral
  • that individuals, partnerships, C corporations (including RICs and REITs) and certain other entities may defer capital gains
  • the requirements that must be met by a taxpayer to defer capital gains by investing in a QOF
  • the QOF self-certification process and elections regarding the taxable year and month that an entity becomes a QOF, which allows existing entities to qualify in certain circumstances
  • the rules regarding the requirements that must be met by a corporation or partnership to qualify as an Opportunity Fund
  • how to treat capital gains that are recognized by a pass through entity, or if preferable, by a taxpayer through an interest in a pass-through entity
  • rules on how to treat deferred gain at the end of the deferred gain period under a variety of different circumstances
  • rules clarifying the “original use” condition and “substantial improvement” test as it applies to the acquisition of real estate, including land
  • tax attributes of deferred gain at time of inclusion
  • calculation of “substantially all” as it relates to the Qualified Opportunity Zone business tangible property test
  • reasonable working capital safe harbor

Additionally, the IRS has published draft forms for self-certification of QOFs and reporting deferrals by eligible taxpayers.

For More Information

Click here to access the IRS’ official release. You can also reach out to your Kutak Rock attorney or any of the knowledgeable attorneys listed in the right-hand column of this page.