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Qualified Opportunity Zones, the Final Regulations: What’s New, What’s Changed, and What’s Stayed the Same

On December 19, 2019, the U.S. Treasury Department (Treasury) and the Internal Revenue Service (IRS) released the final regulations relating to investment in Qualified Opportunity Zones (QOZ). This investment program was initiated by the 2017 Tax Cuts and Jobs Act (which we wrote about here), and has undergone two rounds of proposed regulations, with a first release on October 29, 2018, and a second release on May 1, 2019.

This article provides an overview of some of the main rules that are new, some that have changed, and those that have stayed the same.

What’s Stayed the Same

Many of the baseline requirements and benefits have stayed the same, given that they are based in the statute rather than left to regulatory discretion. 

For example, although the Treasury and the IRS received numerous requests to extend or modify the timing of the program to enable more investors to take advantage of the tax benefits, they did not do so, noting that December 31, 2026, deadline is provided by statute. This means that investors looking to invest eligible gains now may certainly do so, but such gain will be included in their income before the second basis step up (5 percent) could be applied to the investment in year seven.

The similar bright-line requirement that property be acquired after December 31, 2017 in order to be qualifying property also remains the same, for the same reason.

The basic requirements to qualify as a Qualified Opportunity Fund (QOF) or a Qualified Opportunity Zone Business (QOZB) also have not changed. A QOF must still ensure that 90 percent of its assets are invested in QOZ property (the “90 percent investment standard”), and a QOZB must still ensure that 70 percent of its tangible property (owned or leased) is QOZB property (the “70 percent use test”). QOZBs are also still subject to requirements that 50 percent of total gross income be derived from the active conduct of the trade or business, that 40 percent of intangible property must be used in the trade or business, and that less than 5 percent of its property is non-qualified financial property (the “NQFP limitation”).

Additionally, with respect to QOFs specifically, although numerous commentators called for a 31-month working capital safe harbor for QOFs similar to that provided for QOZBs (to ease the burden of the 90 percent investment requirement at the outset), the Treasury and the IRS declined to do so, citing concerns that such a safe harbor would result in QOFs holding capital for extended periods and delaying investment into QOZs. The Treasury and the IRS also declined to adopt a safe harbor for QOFs in their wind-down periods because doing so might encourage early disinvestment from QOZs.

What’s Changed

Qualifying as a QOF or QOZB

There were a number of changes made with respect to how and what kind of investments and activities may be included for the purposes of determining whether a QOF and/or QOZB has satisfied its qualification requirements.

In particular, for both QOZBs and QOFs, tangible property that is manufactured, constructed, or produced may be qualifying property, but only if it is intended to be used in the QOZB or QOF trade or business. (Such property is treated as “acquired” for the purposes of the 90 percent investment standard and the 70 percent use test on the date physical work of a significant nature begins.)

In addition, the final regulations provide numerous clarifications with respect to the QOZB requirements, including permitting inclusion of certain short-term leased property (even to lessees outside a QOZ), allowing an option to either include or exclude inventory, and applying the rules to mobile tangible property.

Original Use

Although there was no change in the definition of “original use,” the final regulations provide additional examples of what may satisfy the original use requirement, such as a building that is newly constructed and sold to a purchaser and which has not yet been placed into service for purposes of depreciation at the time of the sale.

The five-year vacancy requirement with respect to “original use” has been revised as well. Instead of requiring that a building or structure has been vacant for at least five years, the final regulations provide that (i) for property that was vacant prior to the date of publication of QOZ designations and up until the purchase of the property, there is only a one-year vacancy requirement, and (ii) for property that was not vacant prior to the date of publication of QOZ designations, there is only a three-year vacancy requirement. For the purpose of these requirements, a property is considered “vacant” if more than 80 percent of the building or land (as measured by the square footage of usable space) is not being used.

Additionally, the final regulations clarify that real property that is a brownfield site, including land and structures located thereon, will be treated as satisfying the original use requirement.  But, to ensure that these sites are remediated, the regulations also require that the QOF or QOZB make investments to improve safety.

Substantially Improved

The requirement that non-original use property be “substantially improved” also remains, but the final regulations now permit asset aggregation in certain circumstances, including with respect to buildings across contiguous QOZs.

The Treasury and the IRS also clarified that adjusted basis, not cost basis, is the appropriate standard for calculating whether a property has been substantially improved (i.e., that, at the end of 30 months, additions to basis must exceed the amount equal to the adjusted basis at the beginning of such 30-month period). The final regulations also enumerate certain betterment expenses that may be included in calculating substantial improvement.


Under the proposed regulations, certain safe harbors (namely the 31-month working capital safe harbor) could be tolled where a delay was caused by government action (i.e., permitting processes). The final regulations clarify that this rule is not to be read as a per se tolling provision; rather, tolling will only apply where no other action can be taken during the period of government delay, and then only if the permitting is completed during the 31-month period.

Investment Deadlines and Inclusion Events

There is new variation in the time at which the 180-day period for investment begins. For example, eligible §1231 gain must now be invested within 180 days of the realization event (and is also now subject to an array of recapture rules upon inclusion), whereas, for RIC and REIT dividends, shareholders who received distributed dividends may elect to invest those gains either within 180 days from receipt or within 180 days from the end of the shareholder’s taxable year.  A similar election is provided for taxpayers receiving payments under an installment contract: the taxpayer may reinvest either 180 days from the date a payment is received or 180 days from the end of the taxable year in which installment payments are received.

Additionally, if a taxpayer’s qualifying investment is subject to an inclusion event, the taxpayer may now reinvest the included (deferrable) gain back into the original QOF or into a new QOF.  Similarly, a QOF that receives proceeds from the return of capital or the disposition of its QOZ property has 12 months to reinvest such proceeds; that is, such proceeds will not cause the QOF to fail the 90 percent investment standard if they are reinvested within 12 months, and so long as they are held continuously in cash, cash equivalents or debt instruments with a term of 18 months or less. (Generally, however, such QOF proceeds are still recognized and subject to tax.)

The final regulations confirm though that no such reinvestment safe harbor is available to QOZBs, which may limit the ability to “churn” properties. QOZBs may, however, avail themselves of the 31-month working capital safe harbor to in order to characterize proceeds as QOZB property.

Importantly, with respect to inclusion of gain in general, the final regulations clarify that gain is subject to the tax rate of the year of inclusion, not the year of deferral.

What’s New

Safe Harbors

Although commentators did not get the similar 31-month working capital safe harbor they wanted for QOFs, the Treasury and the IRS did incorporate a six-month grace period for instances when a QOF’s failure to maintain the 90 percent investment standard is caused by the failure of a QOZB to maintain its status. The grace period is not subject to tolling and will apply only once, and, if the QOF fails again to meet the 90 percent investment standard, the QOF must apply the penalty retroactively to the grace period.

The final regulations also provide for two sequential or overlapping 31-month working capital safe harbors (62 months total). Specifically, in order to qualify for this safe harbor, there must be multiple cash infusions, the first of which can be used to qualify for a 31-month safe harbor. Upon receipt of a subsequent cash infusion, the original 31-month safe harbor may be extended for another 31 months (during which both the initial and subsequent cash infusions would be covered). This second 31-month period must be supported by a distinct plan, but one that forms an integral part of the initial plan, and the second cash infusion must be more than a de minimis amount.

A QOZB may also receive up to 24 additional months to meet the working capital safe harbor requirements when the improved property is in a QOZ that is designated as a federally declared disaster area.

There is also a new 30-month substantial improvement safe harbor that treats a QOF or QOZB as satisfying the original use or substantial improvement requirement for property in the process of being improved (but not yet placed into service) when there is a “reasonable expectation” that the property will be used in the QOZ as part of the trade or business of the QOF or QOZB.

Eligible Taxpayers

Nonresident alien individuals and foreign corporations may make a deferral election for capital gain that is effectively connected to a U.S. trade or business, but only if the taxpayer irrevocably waives any treaty benefits that would exempt such gain from federal income tax vis-à-vis a form or written statement. The rationale here is not new, however: that gain eligible for deferral must be subject to federal income tax. There is an exception for partnerships, which cannot always know the specific tax consequences of each partner, but this exception will be subject to the anti-abuse rule.

Consolidated Groups

A special note with regard to consolidated groups: the QOZ regulations for consolidated groups have been moved to the regulations regarding consolidated returns. These final regulations incorporate new rules regarding consolidation of QOF subsidiaries, characterization of intercompany transfers and transactions, application of single-entity treatment, and elective transition relief options.

In Sum

The regulations governing the QOZ program are extensive. This article provides a brief overview of some of the main benefits and features, but the devil will be in the details. Each unique investment opportunity needs to be evaluated carefully in light of this additional guidance.

© 2020 Schiff Hardin LLPNational Law Review, Volume X, Number 30



About this Author


Rebecka has worked in a variety of practice areas including real estate, corporate compliance, government contracting of financial service products, general civil litigation, family law, and criminal appeals. She has also served as a judicial intern and law clerk in federal and state courts, and draws on this judicial experience in analyzing the best solutions for specific client issues. In addition, Rebecka draws on her background in linguistics when analyzing issues that arise concerning the development of legal language, particularly in the interpretation and...

Robert R. Pluth Tax Attorney Schiff Hardin Chicago, IL

Robert Pluth, Jr. is the Leader of Schiff Hardin’s Tax Practice. Bob represents taxpayers and personal, corporate, and family offices in connection with various federal and state income tax planning and tax controversy matters, including those involving complex tax accounting matters and transactional disputes.

Bob also implements customized tax, succession and estate planning strategies to enable business owners and other wealthy individuals to better achieve their long-term goals.  

Bob thrives on the challenge of making complex tax laws understandable for those planning...