On Oct. 19, the IRS and Treasury Department issued proposed regulations and a Revenue Ruling as the first part of its long-anticipated guidance package regarding the Opportunity Zone program. Enacted at the end of last year as part of the 2017 Tax Act, the Opportunity Zone program offers significant tax incentives (including gain deferral and partial exclusion) to investors who make qualified investments of capital gains in Opportunity Zones — i.e., the low-income urban and rural communities that were designated as Opportunity Zones earlier this year.
With more than 8,700 designated Opportunity Zones across all 50 states, territories and the District of Columbia (see map provided by the Economic Innovation Group), these tax incentives have energized the investment and development community across the United States. Many have been waiting on the sidelines, ready to take part in this program pending further guidance from Treasury.
The proposed regulations released today provide that much-needed and timely guidance to those seeking to develop and invest in qualifying projects in Opportunity Zones. With respect to Qualified Opportunity Zone Funds — i.e., corporations or partnerships organized for the purpose of making qualified investments in Opportunity Zones — the proposed regulations address self-certification and valuation of fund assets, and include guidance on the type of qualifying opportunity zone business investment. In addition, the proposed regulations provide guidance to investors on: (i) the types of gains that may be deferred; (ii) the time by which investments must be made; and (iii) the manner in which investors make the election to defer gains.
Revenue Ruling 2018-29 addresses discrete Opportunity Zone issues pertaining to a fund’s purchase of an existing building located in one of these zones. Specifically, the ruling provides guidance on whether such building would meet the “original use” requirement, and how to measure a substantial improvement made to an existing building.
The preamble to the proposed regulations states that Treasury and IRS are working on regulations to address other issues, such as the meaning of “substantially all” in the statute, and the information reporting requirements.
Visit the IRS website to access the full text of the proposed regulations and Revenue Ruling 2018-29.
McGuireWoods is dedicated to updating clients on legislative and business developments regarding Opportunity Zones and has assembled a multidisciplinary team to advise on all related aspects. If you have any questions regarding these issues, please contact your primary attorney at McGuireWoods or any of the authors.