By Paul R. Wassgren

As the U.S. Treasury Department released 544 pages of final OZ regulations last week, some investors feared that Treasury Secretary Mnuchin would be the grinch that stole Christmas. To the relief of both investors and industry practitioners, it appears the regulations provide a market-friendly clarification of many, though not all, of the issues raised over the past two years since the Tax Cuts and Jobs Act of 2017 (TCJA) became law, giving birth to Qualified Opportunity Zones (QOZs).

To be clear, lawmakers in Whoville continue to debate new legislation that would modify the TCJA with respect to QOZs. U.S. Senator Wyden introduced a bill that would denude nearly 200 census tracks of their QOZ status, and U.S. Senator Scott, an original sponsor of the QOZ program, has championed additional legislation expanding the reporting requirements for those utilizing the QOZ program. Until any of those new ideas are enacted by the federal government, however, the Treasury Department can only promulgate rules and regulations under the TCJA.

Here are a few highlights from the final regulations:


• For investors realizing a capital gain through a pass-through entity, such as a member of a LLC taxed as a partnership, the 180-day window within which they must invest the gain into a Qualified Opportunity Fund (QOF) begins on the due date of the pass-through entity’s return rather than the last day of the pass-through entity’s tax year. This provides investors with more time.

• Previously, Section 1231 gains, such as gains from the sale of real property used in a trade or business, could only be invested on a net basis beginning on the last day of the tax year, which would have triggered an avalanche of transactions on Dec. 31, 2019, as investors with Section 1231 gains sought to transfer money into a QOF before losing the full 15% step-up in basis under the 7-year rule. The final regulations clarify that Section 1231 gains can be invested on a gross basis beginning on the date the gain is realized. This simplifies the timing for many investors.

• Similarly, capital gains from REIT interests can now be invested as soon as the gains arise instead of waiting until year-end. However, investors may still elect to wait until the end of the tax year to start the 180-day window, giving investors much more flexibility on timing.

• The regulations double the working capital safe harbor from 31 months to 62 months for start-up businesses, and the working capital safe harbor is extended to 55 months when a project is delayed due to a disaster and the opportunity zone is located in a federally declared disaster area.

• The vacancy period to meet the original use test has been reduced from 5 years to 1 year if a building was vacant at the time the QOZ was designated and remained vacant until purchased by a QOF or a Qualified Opportunity Zone Business (QOZB). If the building was not vacant at the time of designation, the vacancy period is 3 years.


• Properties can be aggregated for purposes of meeting the substantial improvement test if they are on the same or contiguous land. This provides greater flexibility for developers who seek to improve existing structures in QOZs that may not require enough capital improvement to satisfy the substantial improvement test.


• For brownfield remediation sites, both land and structures can be considered as meeting the original use test.


• There is now a rebuttable presumption that leases between unrelated parties are at market rate.

• Leases from state and local governments as well as tribal governments are not required to be at market rate.


• Capital gains from the sale of property held by a QOZB now qualify for the 10-year exclusion election. The proposed regulations had limited the application of the 10-year exclusion rule to sales by the QOF. This, too, will provide flexibility to investors.

The extensive preamble to the final regulations reveals that the Treasury Department reviewed and considered a plethora of comments from the marketplace. Although many of those comments were ultimately not accepted, the Treasury Department has now removed much of the regulatory uncertainty that had inhibited some investors from utilizing the QOZ program, and the final regulations support a market-friendly program that may help fuel the domestic economy in 2020 and beyond.