By: Brent Carney, Esq.

Included with the 2017 Tax Cuts and Jobs Act, P.L. 115-97, 131 Stat. 2054, that amended the Internal Revenue Code of 1986 is a provision known as the Investing In Opportunity Act (the “Act”). It is now codified at 26 U.S.C. 1400Z-1 (Section 1) through 1400Z-2 (Section 2) and it became effective on December 22, 2017.

Section 1 of the Act authorized the process for the selection and designation of certain low-income community population census tracts as Qualified Opportunity Zones. The selection process included the input from the governors of each state and the chief executive officer of any possession of the United States. Certification of the nomination and designation of the selected Qualified Opportunity Zones occurred through the Secretary of the Treasury. Additionally, pursuant to the Act, every low-income population census tract in Puerto Rico was automatically deemed certified and designated as a Qualified Opportunity Zone. There are currently more than 8700 designated Qualified Opportunity Zones in all 50 States, the District of Columbia, American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the Virgin Islands. Importantly, the Qualified Opportunity Zones have a ten (10) year lifespan and therefore all 8700+ designated Qualified Opportunity Zones will automatically expire in 2028.

Section 2 of the Act provides the framework for the use of capital gains to be invested in Qualified Opportunity Zones to foster economic revitalization. This section is the Act’s engine for private economic revitalization and it sets up the capital gains deferral and tax breaks for individuals, C corporations, including regulated investment companies and real estate investment trusts (REITs), partnerships and certain pass-through entities that invest their capital gains into Qualified Opportunity Funds (collectively hereinafter the “Taxpayers”). The Secretary of Treasury is required to issue regulations necessary to carry out the purpose of Section 2 of the Act.

On October 19, 2018, the United States Treasury Department issued proposed first-round regulations in order to provide clarification to many of the undefined terms in the Act and to encourage investors to invest their capital gains in Qualified Opportunity Funds. Public comment on the first-round rules will end on December 28, 2018, and a public hearing is scheduled for 10:00 a.m. on January 10, 2019, in the IRS auditorium located in the IRS Building on Constitution Avenue in Washington D.C. The first-round rules were published in the Federal Register on October 29, 2018. Further clarity regarding a portion of the Act occurred through Revenue Ruling 2018-29, held on October 19, 2019. It is anticipated that the first-round rules will be finalized in the spring, 2019. A second round of rules is expected to be published for public comment before the end of this year. Clarification of the Act is critical for several reasons, including but not limited to, encouraging large institutional investors to invest capital gains into Qualified Opportunity Funds in order to revitalize businesses and properties within Qualified Opportunity Zones.


The Act is definition oriented. It provides that Taxpayers may defer their capital gains made from the sale or exchange with an unrelated person of any property held by the taxpayer (for example, the sale of stock or real estate) provided that their capital gains are invested into a Qualified Opportunity Fund (the “Opportunity Fund”) within 180 days from the date of the sale or exchange. The Opportunity Fund must invest 90% of its assets into an Opportunity Zone for its revitalization. The number of Opportunity Funds is unlimited. The creation of an Opportunity Fund only requires self-certification on IRS Form 8996, without the need for any approval from the United States Treasury. Pursuant to the proposed first-round rules, the self-certification must identify the first taxable year that the eligible entity wants to be an Opportunity Fund (this becomes important in triggering the commencement date for the 90% asset test of the Opportunity Fund in the Opportunity Zone in order to avoid penalties). In other words, Opportunity Funds are managed entirely by the private market and their management is handled by fund managers rather than government agencies or the Taxpayer investors. Early withdrawal by an investor Taxpayer may require fund manager approval.

Presently, there exists online several start-up Opportunity Funds seeking capital gain funding from Taxpayers. Some online sites provide overviews of what they consider to be the “top ten” Opportunity Zones in the United States that the Opportunity Fund may invest in the future. Given the tight timeframes contained in the Act and proposed regulations for the revitalization to occur with the Opportunity Zone from the assets of the Opportunity Fund, it is anticipated that Opportunity Zones that have the least amount of governmental restrictions or risk in achieving the project within IRS required timeframes will be funded first.  Importantly, the designation of 8700+ Opportunity Zones does not mean that there will necessarily be a corresponding number of Opportunity Funds to revitalize all of the Opportunity Zones. One principal research associate in the Metropolitan Housing and Communities Policy Center at the Urban Institute speculates that only 10 – 15% of the 8,700+ Opportunity Zones will be revitalized with 90% of the funding going to those Opportunity Zones.

Taxpayers can realize the following three (3) tax benefits from investing capital gains into an Opportunity Fund: (1) Deferral of capital gains tax until 2026; (2) a 10% reduction on those gains if held in the Opportunity Fund for five (5) years or a 15% reduction on those gain if held in the Opportunity Fund for at least seven (7) years; and (3) tax-free growth of their opportunity investment if it is held for at least ten (10) years in the Opportunity Fund.   The proposed first-round regulations clarify that the expiration of all the Opportunity Zones on December 31, 2028, will not impede the tax-free growth of the Taxpayer opportunity investment if made on or before June 30, 2027, and the proposed first-round rules permits holding through December 31, 2047.

The Opportunity Fund is defined by the Act as: “[A]ny investment vehicle which is organized as a corporation or partnership for the purpose of investing in Qualified Opportunity Zone Property (other than another qualified opportunity fund) that holds at least 90 percent of its assets in a Qualified Opportunity Zone Property . . . .” 26 U.S.C. sec. 1400Z-2(d)(1) (emphasis added).

A “Qualified Opportunity Zone Property” means any of the following three (3) types of assets:

  1. Qualified Opportunity Zone Stock;
  2. Qualified Opportunity Zone Partnership Interest; or
  3. Qualified Opportunity Zone Business Property.
  4. 26 U.S.C. sec. 1400Z-2(d)(2)(A).

The Opportunity Fund may own a mix of the aforementioned types of Qualified Opportunity Zone Property in any combination and those assets must comprise at least 90% of the Opportunity Fund’s portfolio within the first six (6) months of the commencement date of the Opportunity Fund and at year end as measured by a 90% asset test. The first two types of assets must be in exchange for cash that results in the Opportunity Fund owning a portion or all of a domestic corporation or partnership in which “substantially all” the corporation or partnership’s tangible property is situated in the Opportunity Zone and that corporation or partnership constructs a project in the Opportunity Zone either from the ground-up or, in the alternative, doubles the basis of an existing building in the Opportunity Zone through renovation within 30 months of the Opportunity Fund’s purchase of stock or partnership interest. The third type of asset is direct ownership by the Opportunity Fund of the project to be constructed in the Opportunity Zone from the ground-up or, in the alternative, renovation of an existing building in the Opportunity Zone such that the basis of the building is doubled within 30 months from the date of property acquisition by the Opportunity Fund.

The aforementioned summary can be broken down as follows:

An Opportunity Fund means a corporation or partnership that holds 90% of its assets in any mix of the following assets:

  • Stock of a corporation that is a “Qualified Opportunity Zone Business”;
  • An interest in a partnership that is a “Qualified Opportunity Zone Business”; or
  • “Qualified Opportunity Zone Business Property”.

A “Qualified Opportunity Zone Business” is a business in which “substantially all” of the assets are “Qualified Opportunity Zone Business Property.”

“Qualified Opportunity Zone Business Property” means property that is:

  • Located in an Opportunity Zone;
  • The “original use” of such property in the Opportunity Zone commences with the Opportunity Fund or the Opportunity Fund “substantially improves” the property;
  • During substantially all the Opportunity Fund’s holding period for such property, substantially all of the use of such property was in an Opportunity Zone.

“Original use” is not presently defined and in soliciting comments for the proposed first-round rules the Treasury Department and the IRS are requesting comments regarding potential approaches to this definition. The definition of “original use” will be important in the Local Redevelopment and Housing Law context in which an area in need of redevelopment or rehabilitation overlaps with an Opportunity Zone. Unlike the definition of “substantially improves” which requires the expenditure of capital from the Opportunity Fund to at least equal to the basis of an existing building within the tight timeframe of 30 months from the date of acquisition of real property, there does not appear to be such a time limit constraint for construction from the ground-up if it is considered original use.

As published in the Federal Register on October 29, 2018:

In connection with soliciting comments on these proposed regulations the Department of Treasury (Treasury Department) and the IRS is presently seeking comment on all aspects of the definition of “original use” and “substantial improvement.” In particular, they are seeking comments on possible approaches to defining the “original use” requirement, for both real property and other tangible property. For example, what metrics would be appropriate for determining whether tangible property has “original use” in an opportunity zone? Should the use of tangible property be determined based on its physical presence within an opportunity zone, or based on some other measure? What if the tested tangible property is a vehicle or other movable tangible property that was previously used within the opportunity zone but acquired from a person outside the opportunity zone? Should some period of abandonment or under-utilization of tangible property erase the property’s history of prior use in the opportunity zone? If so, should such a fallow period enable subsequent productive utilization of the tangible property to qualify as “original use”? Should the rules appropriate for abandonment and underutilization of personal tangible property also apply to vacant property that is productively utilized after some period? If so, what period of abandonment, underutilization, or vacancy would be consistent with the statute? In addition, comments are requested on whether any additional rules regarding the “substantial improvement” requirement for tangible property are warranted or would be useful.

83 F.R. 54279 (Oct. 29, 2018) (emphasis added).

“Substantially improves” means “during any 30-month period beginning after the date of acquisition of such property, additions to basis with respect to such property in the hands of the qualified opportunity fund exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the [Opportunity Fund].” 26 U.S.C. sec. 1400Z-2(d)(2)(D)(ii). In other words, the Opportunity Fund must invest more in the improvement of the building than it did to buy the building within 30 months of acquisition of the property.

On October 19, 2018, Revenue Ruling 2018-29 clarified that “substantially improves” pertains to a building and not the land. The proposed first-round regulations incorporate the holding in Revenue Ruling 2018-29 to exclude the value of land in the definition of substantial improvement.

As set forth above, a “Qualified Opportunity Zone Business” requires that “substantially all” the tangible property is owned or leased within the Opportunity Zone. The first-round regulations propose to define “substantially all” to mean at least 70% of the tangible property of the corporation or partnership must be within the Opportunity Zone. An example of this might be a restaurant chain that has some of its business outside the Opportunity Zone. Importantly, a Qualified Opportunity Zone Business does not include “sin” businesses such as any private or commercial golf course; country club; massage parlor; hot tub facility; suntan facility; racetrack or other facility used for gambling; and any store which is for the sale of alcoholic beverages for consumption off the premises. Additionally, the corporation or partnership must derive at least 50% of its total gross income from active conduct of the business in the zone.

Due to concern that the Opportunity Fund would not be able to deploy funds soon enough to satisfy the 90% asset test within the first six months of commencement of the Opportunity Fund, the proposed first-round regulations provide a safe harbor rule. Section 2 of the Act defines the 90% asset test to mean the following measurement in order to avoid IRS penalties: “[T]he average of the percentage of qualified opportunity zone property held in the fund as measured on the last day of the first 6-month period of the taxable year of the fund and on the last day of the taxable year of the fund.” 26 U.S.C. sec. 1400Z-2(d)(1). This test has led to proposed first-round regulations to provide a 31-month safe harbor rule if the Opportunity Fund has purchased the stock or partnership interest in a Qualified Opportunity Zone Business. Specifically, the proposed first-round rules provide that the opportunity zone business can hold the working capital for up to 31 months if there is a written plan that identifies the amounts held for the acquisition, construction or substantial improvement of tangible property in the Opportunity Zone; and the working capital assets are actually used in a manner that is consistent with the Act.

The proposed first-round regulations provide the following example that is illustrative of the above:

In 2019, Taxpayer realized $w million of capital gains and within the 180-day period invested $w million in QOF T, a qualified opportunity fund. QOF T immediately acquired from partnership P a partnership interest in P, solely in exchange for $w million in cash. P immediately placed the $w million in working capital assets, which remained in working capital assets until used. P had written plans to acquire land in a qualified opportunity zone on which it planned to construct a commercial building. Of the $w million, $x million was dedicated to land purchase, $y million to the construction of the building, and $z million to ancillary but necessary expenditures of the project. The written plans provided for purchase of land within a month of receipt of cash from QOF T and the remaining $y and $z million to be spent within the next 30 months on construction of the new building and on the ancillary expenditures. All expenditures were made on schedule, consuming the $w million. During the taxable years that overlap with the first 31-month period, P had no gross income other than that derived from the amounts held in those working capital assets. Prior to completion of the building, P’s only assets were the land it purchased, the unspent amounts in the working capital assets, and P’ work in progress as the building was constructed.

The following flow-charts and examples are also illustrative of the process, which were published in “A Primer on the New Federal Qualified Opportunity Zone Provisions” authored by Alveno Castillo, Esq., and Ashley Wicks, Esq., from the law firm Butler Snow on Feb. 9, 2018:

Assume InvestFund acquires stock or a partnership interest of a QOZB (the “SPE”), and the SPE uses these investments to acquire and improve a low-income housing development (the “Project”).  Specifically, the SPE owns or leases and undertakes to develop and improve the Project.  The SPE will have to “substantially improve” the Project to the extent that the Project property’s adjusted basis at the end of the 30 month improvement period (commencing on the date of the acquisition of the Project) will exceed its adjusted basis on the date of the Project’s acquisition.

Alternatively, rather than investing in the SPE’s stock or partnership interest, InvestFund may invest directly in QOZBP by acquiring the Project itself and substantially improving it within the 30 month period following acquisition.


It is anticipated that the United States Treasury Department will issue proposed second-round regulations prior to the end of this year. It is expected that the proposed second-round regulations will address many issues, including, but not limited to: (1) the definition of “original use”; (2) reporting requirements; and (3) identifying the “reasonable period” for an Opportunity Fund to reinvest proceeds from the sale of qualifying assets without paying a penalty and information reporting requirements.


In order to be competitive, it is recommended that municipal government advertise and promote their Opportunity Zones. The program is built to influence the behavior of investors, which is based on risk tolerance. Municipalities have less of a project-by-project or transactional role, but they can be proactive in galvanizing awareness by marketing their Opportunity Zones directly to fund managers of the Opportunity Funds and in the local business community about the program. It will be important for governmental leaders get their Opportunity Zones on the radar for regional or national based Opportunity Funds.


The Act provides powerful tax incentives to Taxpayers to invest their capital gains in Opportunity Funds to promote the revitalization of distressed properties in the thousands of designated Opportunity Zones. Risk of completing a project within the Opportunity Zone within the timeframes set forth in the Act will be a guiding factor in determining which Opportunity Zones are funded. Encouraging the Department of Treasury and the IRS to adopt a definition of “original use” that underutilization of property erases the property’s history of prior use in the opportunity zone is imperative for areas in need of redevelopment or areas in need of rehabilitation. This unique funding mechanism to direct private investment to the Opportunity Zones could become a major catalyst to spur revitalization in these areas through private investment. In areas in need of redevelopment or rehabilitation that overlap Opportunity Zones, it may be important to think of Opportunity Fund risk in the Opportunity Zone during the drafting of redevelopment documents to further encourage Opportunity Funding for the redevelopment project for which redevelopment is not yet underway.