On April 17, 2019, the Treasury Department released the second set of proposed regulations on opportunity zones. These newly proposed regulations address many key issues in a manner that is generally favorable for taxpayers, and they reduce or eliminate many of the roadblocks that were preventing taxpayers from taking advantage of opportunity zone investments. Some of the significant developments are as follows:
- Previously, an investor was required to sell its investment in an opportunity zone fund in order to reap the full tax benefits of the opportunity zone rules; no tax benefits were provided with respect to gain that the fund recognized when it sold an asset. Under the newly proposed regulations, the tax benefits are extended to some of the gains a fund recognizes when it sells an asset. This change should make it easier to form opportunity zone funds that hold multiple assets.
- Tangible property is generally not qualified opportunity zone business property unless the fund "substantially improves" the property or is the "original user" of the property. Under the newly proposed regulations, an opportunity zone fund may be treated as the "original user" of property that has been unused or vacant for at least five years.
- Land (improved or unimproved) generally constitutes qualified opportunity zone business property when it is used in an active trade or business, except in situations that are viewed as abusive. There previously was uncertainty in how the land would be treated.
- Leased property may constitute qualified opportunity zone business property; the fund does not need to "substantially improve" the property or be the "original user" of the property. In addition, the property may be leased from a related party, but in that case, additional restrictions may apply. Before the release of the proposed regulations, the treatment of leased property was unclear.
- The deadline for deploying working capital generally remains 31 months, but this period may sometimes be extended when the opportunity zone fund is waiting to receive government permits or approvals.
- The proposed regulations address the tax treatment of cash distributions, including debt-financed distributions. Some distributions may be tax-free for investors.
Although these regulations are only proposed at this point, they may be relied upon until final regulations are issued.
There is still uncertainty in how the rules will be applied, but many of the significant questions have now been answered, and there is now more flexibility in how opportunity zone projects may be structured.