The Internal Revenue Service released its highly anticipated second set of Qualified Opportunity Zone regulations on April 17, 2019. This new set of regulations answers many questions that were left open following the release of the first set of regulations last year, but the regulations also leave certain issues unresolved.
Some of the more important issues that have been dealt with in the proposed regulations, and which will be discussed at our upcoming webinar (referred to below), include the following:
- The treatment of debt-financed distributions from the qualified opportunity fund (“QOF”) to its owners;
- Special elections that will be available to QOF investors to defer gain on the QOF’s sale of assets held for more than ten years;
- Treatment of contributions of non-cash assets to the QOF;
- Clarification of what is meant by the term “original use,” with a new exception provided for property that has been vacant for at least five years;
- Impact of transfers on death;
- Expansion of the 31 month working capital safe harbor requirement;
- Clarification of the timing of the rollover period for “Section 1231” gains;
- Clarification of the treatment of land, for purposes of the 90% and 70% tests;
- Situations where a lease of property does not have to satisfy the “original use” or “purchase” requirement;
- A detailed explanation of events that trigger an acceleration of the deferred gain (so-called “inclusion events”)
- Rules clarifying the application of the rule that 50% of the gross income of a qualified opportunity zone business be derived from the active conduct of a trade or business in the opportunity zone;
- Relief for newly contributed assets;
- Clarification regarding the timing of a QOF’s investment of capital; and
- Treatment of real property straddling a qualified opportunity zone.
With the issuance of this second set of regulations, it is likely that investor and developer interest in the Opportunity Zone program will continue to accelerate. The fact that investors will be able to benefit from the ten-year gain exclusion on the new Opportunity Zone investment without having to dispose of their interests in the QOF is a very positive development. Developers should welcome the clarification provided by the regulations in the working capital, original use and leased property areas.
Shipman & Goodwin will be presenting a webinar on Friday May 30 at noon to discuss the significant issues that the IRS addressed in the new regulations and also to review the impact that the new set of regulations will have on Opportunity Zone investments, both from an investor and a developer perspective. Click here to register for the upcoming webinar.