Final Opportunity Zone Regulations Released

It’s been two years since the federal government’s Opportunity Zone Program became law. The final round of regulations of the tax incentive program have now been released to the public.

The U. S. Treasury Department and the IRS issued the regulations in December with a number of substantial changes and additions from previous iterations. The regulations clarify which properties and businesses will qualify for the tax breaks by firming up guidelines for investors surrounding aggregation of developments on one property to meet the substantial improvement requirement. The regulations also address what happens to investments that are pulled out of opportunity zone funds before the 10-year hold period is over. Qualified Opportunity Zone Businesses, or QOBs are also covered, including a 5% maximum investment in "sin businesses" that would otherwise be disqualified from the tax break.

The regulations outline how quickly and how much funding investors must provide to get the tax benefits and gives some special leeway for those looking to improve brownfield sites and vacant properties. They also provide information about how companies can invest in opportunity zones.

One of the most significant parts of the final regulations is that qualified opportunity funds (QOF) can now be structured like most funds that invest in multiple businesses or properties. In previous guidelines, the entirety of a QOF had to be sold all at once to qualify for the maximum capital gains tax discount. This was seen as a deterrent to investment in Opportunity Zones. Now qualified opportunity zone funds can sell individual properties, rather than being forced to sell the entire QOF — which includes the LLCs a QOF creates in order to hold properties.

QOFs have so far raised over $4.5B in capital, but many in the investment community have said that several issues have kept investors from committing to development projects. Response from the real estate development industry has been positive so far and officials are hopeful that the clarity brought about in the final regulations will drive more capital into economically stressed communities.