Opportunity Zones offer temporary deferral of capital gains inclusion in gross income


Steve Carter 
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Mike Eickhoff
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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Priya D. Nair 
Washington, DC 
T +1 202 521 1546
The enactment of the tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (TCJA), on Dec. 22, 2017, resulted in a significant overhaul of the federal income tax system in the United States. While much of the focus has been on provisions that would shift the United States to a territorial tax system, the TCJA also established so-called “Opportunity Zones.” Opportunity Zones are designed to “spur private investment in distressed communities throughout the country”1 by offering tax incentives for investing in a “qualified investment zone.” 2

‘Qualified Investment Zone’ designation A qualified opportunity zone is defined as a population census tract that is a low-income community3 designated as a qualified opportunity zone by the Secretary of the Treasury.4 The number of population census tracts that may be designated as qualified opportunity zones in any state cannot exceed 25% of the number of low-income communities in the state.5 However, if the number of low-income communities in a state is less than 100, 25 tracts may be designated as qualified opportunity zones.6 A designation of a population census tract as a qualified opportunity zone remains in effect for the period beginning on the date of the designation and ending at the close of the 10th calendar year beginning on or after the date of designation.7

Tax incentives created by the Opportunity Zones provisions The Opportunity Zones provisions establish several tax incentives to encourage investment in qualified opportunity zones.8 The provisions allow for the “temporary deferral of inclusion in gross income for capital gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains from the sale or exchange of an investment in the qualified opportunity fund.”9

Specifically, gain from the sale or exchange of any property held by the taxpayer to an unrelated person can be temporarily deferred from inclusion in gross income to the extent of the amount invested by the taxpayer in a qualified opportunity fund during the 180-day period beginning on the date of the sale or exchange.10 The year of inclusion for this deferred gain is the taxable year that includes the earlier of: (i) the date when the investment is sold or exchanged; or (ii) Dec. 31, 2026.11

A “qualified opportunity fund” is defined as any investment vehicle organized as a corporation or a partnership to invest in qualified opportunity zone property and holds at least 90% of its assets in qualified opportunity zone property.12 The Opportunity Zones provisions also provide an incentive in the form of an increase in basis of the deferred gain that is tied to the number of years the investment in the qualified opportunity fund is held.13 For investments held for at least five years, the basis of the underlying assets associated with the investment into the opportunity fund is increased by an amount equal to 10% of the amount of the gain deferred.14 If the investment is held for at least seven years, the basis is increased by an additional 5% of the amount of the gain deferred.15

Additionally, if an investment in a qualified opportunity fund is held by the taxpayer for at least 10 years, the basis of the new investments that are made into new qualified property within the opportunity zone will be equal to its fair market value on the date that it is sold or exchanged.16 An affirmative election by the taxpayer must be made to take advantage of this provision.17

The TCJA directs Treasury to promulgate regulations for Opportunity Zones18 but none have been issued to date. The IRS issued Rev. Proc. 2018-16 to provide guidance on the procedures for designating population census tracts as Qualified Opportunity Zones.19 The TCJA provisions governing Opportunity Zones took effect on Dec. 22, 2017. 20

Commentary The creation of Opportunity Zones by the TCJA is generating a substantial amount of interest. According to one estimate, “at least $ 2 trillion in unrealized capital gains” exist for investors to leverage with “a lower capital gains rate that decreases based on the length of the investment.”21 Proponents of the Opportunity Zones program, as adopted under the TCJA, argue that the program will create a measurable success in impoverished areas because it turns on the key incentive of capital gains benefits instead of a tax credit.22

The program is receiving a strong push from the government, as the U.S. Department of the Treasury is “reaching out to state governors to make sure they are aware of the program.”23 There were 15 states and three territories that submitted their applications prior to the March 22 deadline. These applications were approved and, as a result, over 3,500 census tracts have been awarded Opportunity Zone status. Treasury will approve the remaining applications as they are received. Overall, the states have worked hard to reach a balance when designating their Opportunity Zones given the limitations provided in the TCJA. Areas of consideration in the evaluation include urban vs. rural areas, economic need, economic development strategy, diversity, and current economic trends.

While the government continues to work through implementation, what remains unclear is the “how” and the “what.” From the perspective of a corporate or personal investor considering investments in Opportunity Zones, the scope and ability to utilize this program as a method to enhance private investment within approved census tracts will be more widely understood once Treasury promulgates regulations. Treasury is considering multiple options to structure the program, and is seeking feedback from a number of interested parties. However, nothing has been determined as of the date of this alert. 

1 U.S. Department of the Treasury, Press Release - Treasury, IRS Issue Guidance On Opportunity Zones To Spur Private Investment In Distressed Communities (Feb. 8, 2018).
2 IRC §§ 1400Z–1 and 1400Z–2; Rev. Proc. 2018-16.
3 The term “low-income community” is defined in IRC § 45D(e). See IRC §1400Z–1(c). Furthermore, the TCJA allows for a population census tract that is not a low-income community to be designated as a qualified opportunity zone under certain circumstances. See IRC §1400Z–1(e).
4 IRC § 1400Z–1(a)-(b).
5 IRC § 1400Z–1(d)(1).
6 IRC § 1400Z–1(d)(2).
7 IRC § 1400Z–1(f).
8 Joint Committee on Taxation, Explanation of Tax Reform Provisions (2018).
9 Id.
10 IRC § 1400Z–2(a)(1).
11 IRC § 1400Z–2(b).
12 IRC § 1400Z–2(d).
13 IRC § 1400Z–2(b)(2).
14 IRC § 1400Z–2(b)(2)(B)(iii).
15 IRC § 1400Z–2(b)(2)(B)(iv).
16 IRC § 1400Z–2(c).
17 Id.
18 IRC § 1400Z–2(e)(4).
19 Rev. Proc. 2018-16.
20 H.R. 1, SEC. 13823(d).
21 Jonathan Curry, Opportunity Zones Promising, But Must Overcome Lackluster Past, TAX ANALYSTS STATE TAX TODAY, Feb. 15, 2018.
22 Id.

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