IRS Releases Second Set of Proposed Opportunity Zone Regulations

The IRS issued its second set of proposed regulations dealing with Opportunity Zone issues (REG-120186-18). Tax Analysts reported in Tax Notes Today that Treasury officials had indicated in a press briefing related to the release of these regulations that they expect these would constitute the entirety of the regulations for Opportunity Zones, although they did not totally rule out a third set of proposed regulations if it seems necessary.[1]

The summary accompanying the proposed regulations describes them as follows:

This document contains proposed regulations that provide guidance under new section 1400Z-2 of the Internal Revenue Code (Code) relating to gains that may be deferred as a result of a taxpayer’s investment in a qualified opportunity fund (QOF), as well as special rules for an investment in a QOF held by a taxpayer for at least 10 years. This document also contains proposed regulations that update portions of previously proposed regulations under section 1400Z-2 to address various issues, including: the definition of “substantially all” in each of the various places it appears in section 1400Z-2; the transactions that may trigger the inclusion of gain that a taxpayer has elected to defer under section 1400Z-2; the timing and amount of the deferred gain that is included; the treatment of leased property used by a qualified opportunity zone business; the use of qualified opportunity zone business property in the qualified opportunity zone; the sourcing of gross income to the qualified opportunity zone business; and the “reasonable period” for a QOF to reinvest proceeds from the sale of qualifying assets without paying a penalty. These proposed regulations will affect QOFs and taxpayers that invest in QOFs.

The proposed regulations provide that taxpayers may rely on all of the proposed regulations, with the exception of Prop. Reg. §1.1400Z2(c)-1, for periods prior to finalization of the rules.  Otherwise, the rules will apply to taxable years ending after the proposed regulations are published in the Federal Register (so, basically, they will apply to 2019 calendar year returns and those from later years).

[1] Stephanie Cummings, “New Proposed O-Zone Regs May Be the Last, Officials Say,” Tax Notes Today, April 18, 2019, 2019 TNT 75-1, (subscription required)