This posting is intended to provide a summary of some of the relevant regulations issued by the Treasury related to Opportunity Zones on April 17, 2019. Nothing contained in is this posting should be considered legal or tax advice and investors should consult their legal and tax advisors before making any decision to defer capital gains or make an investment in Qualified Opportunity Zone Property or a Qualified Opportunity Zone Business.

The Treasury issued the much anticipated second set of regulations related to investments made in Opportunity Zones under the Tax Cut and Jobs Act of 2017 (the “Act”). The regulations focused on clarifying many terms and provisions of the Act to foster greater certainty among investors looking to pursue investments in Qualified Opportunity Zones (“QOZ”). The regulations update aspects of the previously proposed regulations and to provide clarity on issues such as the requirements for “substantially all” where it is used, transactions triggering inclusion of all or a portion of the deferred gains in a taxpayers gross income, the treatment of leased property used by Qualified Opportunity Zone Businesses (“QOZB”), the sourcing of gross income and other key elements of the Act that affect the operation of the rules with respect to qualifying investments.

This summary is not intended to be comprehensive or a summation of all the legal and tax specific issues addressed by the regulations. There are elements of the regulations related to specific types of structures and transactions that need to be assessed on a facts and circumstances basis for the investors to which these rules apply. Our goal is to provide a summary of the provisions that impact most investors looking to invest in Opportunity Zones and entrepreneurs looking to create businesses in Opportunity Zones or develop real property.

The intent of the specific provisions of the Act with respect to Opportunity Zones are designed to encourage investment and economic growth using tax benefits designed to incentivize taxpayers to invest the tax benefits in businesses and properties in distressed communities. As noted in the regulations issued, the Treasury’s focus is to foster investment that conforms to the intent of Congress in establishing these tax benefits as part of the Act.

Defining “Substantially All” – The term “substantially all” appears numerous times in the law and the regulations address what constitutes “substantially all” in each circumstance. For a Trade or Business, the “substantially all” test is satisfied if at least 70% of the tangible property owned or leased is used within an Opportunity Zone. Leased property can be included in the calculation with an assigned value based on the specified methods in the regulations.

Leased Tangible Property – With respect to leased tangible property, there is no original use requirement. Leased property can be acquired provided from a related lessor however, the lease terms must be market rate with restrictions on prepayments. In calculating the value of leased property for purposes of the 90% test, the leased property shall be valued in accordance with GAAP or at its net present value of the payments to be made under the term of the lease from inception.

Gross Income Test – A QOZB must derive at least 50% of its total gross income from the active conduct of a business within a QOZ. There are three safe harbors for determining if this test is met. The first safe harbor requires at least 50% of the services performed based on hours are performed within the QOZ. The second safe harbor requires at least 50% of the services performed by its employees are performed in the QOZ based on the amounts paid for the services. The third safe harbor requires that the tangible property of the business is in a QOZ and the management or operational functions performed in the QOZ are each necessary to generate 50% of the gross income of the business.

Working Capital Safe Harbor – The working capital safe harbor now applies to a written plan for the development of a trade or business in a QOZ.

QOF Reinvestment of Sale Proceeds – The regulations now address what occurs when a QOF receives proceeds from the sale or disposition of (i) QOZ business property, (ii) QOZ stock or (iii) a QOZ partnership interest. The proceeds from the sale or disposition are included in the 90% test provided the proceeds are reinvested in a QOZ property during the 12-month period beginning on the date of such sale or disposition.

Gains on Sales or Dispositions of QOZ Assets – The proceeds from the sale or disposition of QOZ property, stock or partnership interests can be reinvested within 12 months without extending the 10-year holding period. However, the taxpayer realizing the gain will be required to include the gain in their gross income for the year of sale or disposition.

90% Test – When calculating whether 90% of a QOF’s assets are invested in a QOZB or QOZP, the regulations now provide two exceptions. The first is capital contributed to a QOF within a 6- month measurement period may be excluded from the calculation provided the contribution amount is held in cash, cash equivalents or debt instruments with a maturity of 18 months or less. The second allows the proceeds from the sale of a QOZ asset to be included in the calculation of the 90% test provided the proceeds are reinvested within 12 months of the realization event and the proceeds are held in cash, cash equivalents or debt instruments with a maturity of 18 months or less.

Recognition of Original Deferred Gains – The regulations now provide a complete guide to QOF transactions that require recognition of some or all of the original deferred gain. While the list is comprehensive and involves some very specific transactions, there are a few transactions worthy of mention that will result in recognition by the taxpayer of some or all of the original gain in the taxpayer’s gross income. For all transactions where the amount of the transaction represents only a portion of the taxpayer’s QOF investment, the portion of the original gain to be included in the taxpayer’s gross income is equal to the percentage of the transaction value relative to the fair market value of the taxpayer’s total investment in the QOF.

Gifts – A gift of a QOF investment will require inclusion of the original gain in the taxpayer’s gross income in the year the gift is conveyed.

Donations – Charitable donations of QOF property will require inclusion of the original gain in the taxpayer’s gross income in the year the donation is made.

Transfers – Transfers of QOF interests require inclusion of original gain in the taxpayer’s gross income in the year the transfer occurs. There are also several types of transactions that do not require inclusion of the original gain amount in the taxpayer’s gross income.

Death Transfers – When a QOF interest is transferred due to death of the investor, the transferee steps into the shoes of the deceased investor. They inherit the deferred gain and the holding period to the date of death.

Dividends – Corporate dividends require no inclusion of the original gain as the dividend payment does not result in a change in the investor’s ownership percentage in the QOF. However, the taxpayer must report the dividend in their taxable income in the year received. Generally, any transaction that results in the receipt of cash or property that also alters the taxpayer’s ownership percentage in the QOF requires inclusion of all or some portion of the original gain in the taxpayer’s gross income. Transactions that don’t alter the investor’s ownership percentage generally are not inclusion events.

Mixed-Funds Investments – A taxpayer can invest both deferred gains and other taxable amounts. For mixed-funds investments, gains, distributions, withdrawals or redemptions are generally allocated proportionately between the deferred and taxable amounts invested.

Anti-Abuse Rules – The regulations reference anti-abuse rules that will be enforced against taxpayers who engage in transactions that are inconsistent with the intent of the law. While these rules are not defined, the regulations state that the determination of abuse will be on a facts and circumstances basis.

As noted, the items discussed in this release are highlights of the regulations that are likely to be applicable to most taxpayers investing in QOZs. There are several provisions related to more complex situations and structures that are likely to be addressed by professional firms commenting on these regulations. Consultation with your legal and tax advisors is strongly suggested before deviating from a straightforward investment structure.

The overriding assessment of both sets of regulations issued by Treasury defining the treatment of QOZ investments is that the government has attempted to streamline requirements and limitations for taxpayers provided that investment activities and structures are consistent with the intent of the law to drive investment into distressed areas of the country.


Effective May 1st , our affiliate, JMP Investments Shared Services, will begin providing support services for investors facilitating the formation of multi-asset QOZ asset portfolios and managing the complexities of compliance with the law. If you are interested in learning more about the full suite of services provided to investors and entrepreneurs/project sponsors actively engaged in Opportunity Zone investing, please contact us at Foxdale Management LLC | | 312-375-8796

About Foxdale Management LLC – Foxdale Management LLC (“Foxdale”) is an operational consulting firm assisting public and private businesses, investors and fund managers seeking solutions to operational, regulatory and compliance issues. JMP Investments Shared Services (“JMPSS”) is an extension Foxdale’s work assisting investors interested in taking advantage of the tax deferral opportunities associated with Opportunity Zone investments and sponsors in creating commingled vehicles to pool assets to fund investments in Opportunity Zone locations. JMP provides investors with a platform that provides maximum flexibility to leverage the benefits of the law and corresponding regulations. We can assist with getting the clock started on the deferral and holding periods. Through our network of professionals, JMP assists with structuring and support services to form the QOF and create a structure through an underlying investment in a Qualified Opportunity Zone Business (“QOZB”) that provides the investor with time to evaluate, select and invest in appropriate Opportunity Zone investments.

Nothing in this document is, or should be relied upon, as a promise or representation of the future. In all cases, interested parties should conduct their own investigation and analysis with their designated professional advisers. No representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein is made and the authors shall not be liable for the information contained in, or any omissions from, this document, nor for any of the written, electronic, or oral communications transmitted to the recipient. Neither the receipt of this document by any person, nor any information contained herein or supplied herewith or subsequently communicated in written, electronic, or oral form to any person shall be relied upon as constituting the giving of investment or tax advice by the Company to any such recipient. Each recipient should make his own independent assessment of the merits of investing in Opportunity Zones and should consult his or her own professional advisors. This document contains certain statements, estimates, assumptions and projections which were prepared based upon the best information available at the time this document was prepared and may or may not prove to be correct. There is no representation, warranty, or assurance of any kind, express or implied, and actual results could vary from the conclusions expressed herein, and such variations that may arise could be material.

Register for FREE to comment or continue reading this article. Already registered? Login here.