On April 17, 2019, the Internal Revenue Service (IRS) released a new set of highly anticipated proposed regulations for Opportunity Zones. The newly released set of proposed regulations provides additional guidance and addresses issues that were brought to the attention of the IRS after the first set of rules were released by the IRS on October 29, 2018.
The Opportunity Zone Program, which was created by the 2017 Federal Tax Cut and Jobs Act, is designed to spur economic development and job creation in designated “Opportunity Zones.” Opportunity Zones are low-income census tracts nominated by governors and certified by the U.S. Department of the Treasury allowing investors to direct capital into new projects and enterprises in exchange for significant federal capital gains tax advantages. There are 8,761 Opportunity Zones designated throughout the United States, including 169 located in New Jersey. This incentive allows investors to defer capital gains taxes if they are invested in Opportunity Zones by way of Qualified Opportunity Funds (QOF).
The newly released document provides updated guidance to the regulations under section 1400Z-2 of the Internal Revenue Code to address various issues, including: the definition of “substantially all” in each of the various places it appears in section 1400Z-2; the transactions that may trigger the inclusion of gains that the taxpayer has elected to defer under section 1400Z-2; the timing and amount of the deferred gain that is included; the treatment of leased property used by a Qualified Opportunity Zone Business; the use of Qualified Opportunity Zone Business Property in the Qualified Opportunity Zone; the sourcing of gross income to the Qualified Opportunity Zone Business; and the “reasonable period” for a QOF to reinvest proceeds from the sale of qualifying assets without paying a penalty. These proposed regulations will affect investors in Opportunity Zones.
Connell Foley is currently analyzing the newly proposed regulations on how this can affect our clients. If you have any questions regarding Opportunity Zones, we encourage you to reach out to us to discuss how the Opportunity Zone Program can benefit you.