Treasury Gives Advance Look at Proposed Opportunity Zone Regulations

The Treasury Department and the IRS recently issued Newswire IR-2018-206 announcing an advance version of proposed Opportunity Zone tax incentive regulations. Opportunity Zones, created by the 2017 Tax Cuts and Jobs Act, were designed to spur investment in distressed communities through tax benefits to investors. State governors, the mayor of the District of Columbia, and chief executives of five U.S. territories nominated Opportunity Zones, and the Department of Treasury designated 8,761 zones. Opportunity Zones retain their designation for 10 years.

An Opportunity Zone is composed of “low-income” census tracts that have a poverty rate of at least 20 percent and median family income no greater than 80 percent of the area median income. A census tract that isn’t “low income” may be designated as part of a qualified Opportunity Zone if it’s contiguous with low-income tracts that make up a qualified Opportunity Zone and it has a median household income that doesn’t exceed 125 percent of the median income of the contiguous low-income census tracts that form a qualified Opportunity Zone. Up to 5 percent of the census tracts may qualify under this exemption.

The proposed rule covers very technically complex tax-related provisions. It discusses topics such as gains eligible for deferral, the types of taxpayers eligible to elect gain deferral, attributes of included income when gain deferral ends, offsetting-positions transactions and straddles, and gains of partnerships and other pass-through entities.

The proposed regulations also provide that if at least 70 percent of the tangible business property owned or leased by a trade or business is qualified Opportunity Zone business property, the requirement that “substantially all” of such tangible business can be satisfied if other requirements are met. 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).

In addition to the proposed regulations, the Treasury and IRS issued Revenue Ruling 2018-29, providing guidance on the “original use” requirement for land purchased after 2017 in qualified Opportunity Zones.