IRS Issues Proposed Regulations on Opportunity Zones on October 19

The IRS issued proposed regulations on Opportunity Zones on Friday, October 19, 2018.  The 2017 Tax Cuts and Jobs Act (the “Act”) created Opportunity Zones to spur investment in distressed communities throughout the country by providing tax benefits related to the deferral of capital gains.  Pursuant to the Act, States were permitted to designate certain distressed communities throughout the United States as Opportunity Zones.  By June of 2018, over 8,700 communities in the United States and related territories were designated as qualified Opportunity Zones. According to the Act Investors are allowed to defer tax on almost any capital gain up to Dec. 31, 2026 by making an appropriate investment in an Opportunity zone.

The proposed regulations clarified that almost all capital gains qualify for deferral. In the case of a capital gain experienced by a partnership, the rules allow either a partnership or its partners to elect deferral. Similar rules apply to other pass-through entities, such as S corporations and their shareholders, and estates and trusts and their beneficiaries.

The proposed regulations also clarify what is required to meet the “substantially all” requirement for tangible business property located in an Opportunity Zone.  If the tangible property is a building, the proposed regulations provide that “substantial improvement” is measured based only on the basis of the building (not of the underlying land).  The proposed regulations are subject to public comment and final regulations will likely be issued later next year.

In addition to the proposed regulations, the IRS and Treasury issued Rev. Rul. 2018-29 which provides guidance for taxpayers on the “original use” requirement for land purchased after 2017 in qualified opportunity zones. They also released Form 8996, the form needed to self-certify a fund as a QOF.

You can find more information on Opportunity Zones, including answers to frequently-asked questions on the Tax Reform page of IRS.gov.

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