On April 17, the Internal Revenue Service (“IRS”) issued new proposed regulations to address a number of the outstanding questions and ambiguities pertaining to the Opportunity Zone program. The hope is that the new IRS guidance will spur significant Opportunity Zone investments that have been on the sidelines waiting for additional clarity. The proposed regulations answer major questions regarding original use and substantial improvement of tangible property and vacant land, requirements for being considered a Qualified Opportunity Zone Business (“QOZB”), the treatment of leased property, income inclusion events and distributions, and how long a Qualified Opportunity Fund (“QOF”) has to deploy capital in Qualified Opportunity Zone Property to satisfy the 90 percent asset test.
There are still outstanding issues and questions, including the tax treatment of interim gains of a QOF during an investor’s holding period and QOF compliance reporting, to name a few. However, the IRS’s most recent regulation proposal should facilitate additional activity and deal flow in the Opportunity Zone space. Here are a number of key highlights from the voluminous regulation release:
Real Estate Development
- The regulations specify that the original use and substantial improvement requirements do not apply to vacant land. Accordingly, any development of vacant property should qualify for QOF investment.
- Additionally, structures and buildings that have been vacant for 5 years will satisfy the original use requirement and will not require substantial improvements.