The U.S. Treasury Department (“Treasury”) proposed regulations relating to the new Opportunity Zone tax incentive. The tax incentive is intended to encourage investments in economically distressed communities by allowing taxpayers to defer capital gains tax if they reinvest within 180 days in “qualified opportunity funds” (“QOFs”), which are generally required to maintain at least 90 percent of their assets in “qualifying opportunity zone property.” In addition, an investor who holds a QOF investment for at least 10 years may qualify to increase its basis to the fair market value of the investment on the date it is sold.
The proposed regulations address, among other things, (i) the type of gains that may be deferred by investors (capital gains), (ii) investments in QOFs by pass-through entities, such as partnerships, (iii) guidance as to what constitutes opportunity zone property and what entities are eligible to be QOFs, and (iv) timing and election mechanics. In addition to the proposed regulations, the Treasury and the IRS issued Rev. Rul. 2018-29, which provides guidance for taxpayers on the “original use” requirement for land purchased after 2017 in qualified opportunity zones. The Treasury and IRS also released Form 8996, which investment vehicles will use to self-certify as QOFs.