The Treasury adopted final regulations that will clarify the Opportunity Zone tax incentive for certain equity interests. The final regulation was published in the Federal Register. The regulation will become effective on March 13, 2020.
According to the Treasury, 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"). QOFs are generally required to maintain at least 90 percent of their assets in "qualifying opportunity zone property."
As previously covered, the final regulations address, among other things, (i) the type of gains that may be deferred by investors (i.e., 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.
The final regulations include some revisions from the original proposals but "retain the basic approach and structure of the proposed regulations." The final regulations:
- clarify certain aspects of the proposed regulations;
- split proposed regulation § 1.1400Z2(d)-1 into two separate sections: §§ 1.1400Z2(d)-1 and 1.1400Z2(d)-2;
- combine duplicative rules regarding QOFs and qualified opportunity zone businesses; and
- add additional defined terms to help clarify the "meaning of the numerous provisions cross-referenced in the final regulations."
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