Construction Over There

The proposed regulations provide more clarity for investors interested in these tax-advantaged opportunities.

Tax reform

U.S. Treasury Releases Second Round of Proposed Opportunity Zone Regulations

  • Luke Pope
  • 4/24/2019

The Internal Revenue Service released the long-awaited second round of proposed regulations for Qualified Opportunity Funds (QOF). Issued on April 17, 2019, the guidelines provide additional clarity on the deferred gain rules for investments in QOFs under Section 1400Z-2. The first proposed regulations were issued October 19, 2018.

Under Section 1400Z-1 and 1400Z-2, taxpayers may defer capital gains incurred from the sale or exchange of an asset to an unrelated third party by investing the amount of those gains in QOFs (although watch the timing of the 180-day deferral rules.) A QOF then invests in Qualified Opportunity Zone (QOZ) property. The tax deferment is intended to encourage investment in economically distressed areas throughout the country designated as QOZs.

These proposed regulations clarify several terms used in Section 1400Z-2 and focus on the following topics:

  • QOZ business property
    • What constitutes the “substantially all” threshold as referenced in Section 1400Z-2
    • Original use of purchase property
    • Original use of lease property
    • Treatment of land
    • Substantial improvement
    • Inventory in transit
  • Treatment and valuation of leased property
  • QOZ business
    • Real property straddling a Qualified Opportunity Zone
    • 50 percent of gross income requirement
    • Use of intangibles
    • Active conduct of a trade or business
    • Working capital safe harbor
  • Special rule for section 1231 gains
  • Relief of 90 percent asset test (newly contributed assets)
  • QOF reinvestment rule
  • Amount of investment — deferral election
  • Inclusion events (events that cause recognition of deferred gain)
  • Timing of basis adjustments
  • Consolidated return provisions and 1400Z-2
  • General anti-abuse rule

View the full text of the proposed regulations.

What’s next

The CLA Opportunity Zone team is currently reviewing the regulations and will be providing a comprehensive analysis of the significant developments the proposed rules provide. Watch our Opportunity Zone Resource Center for details.

How we can help

We can help you make clear decisions and realize the full benefits of the Opportunity Zone program before the initial December 31, 2019, deadline. Our business tax planning professionals and wealth advisors are immersed in the real estate field, the investment market, tax reform, and the industries our clients operate businesses in. Whatever road leads you to Opportunity Zones, CLA is right there with you.

Watch our webinar recording: Opportunity Zones: Insights from the Second Round of Proposed Regulations.