Opportunity Knocks – Treasury Releases Second Set of Opportunity Zone Regulations

Clarifications from April 22 The National Law Review. See excerpt below. Read the full article here.

  • Substantially All Definition – the definition of “substantially all” as it is used throughout the OZ rules has been clarified, providing applicable percentage thresholds to meet the test;
  • Capital Gain Exclusion and Multi-Asset QOFs – qualified opportunity funds (“QOFs”) will have more flexibility to include more than one investment in a QOF.  The capital gain exclusion upon disposition of QOFs held for at least 10 years may be available for certain QOFs, such as partnership QOFs, if the QOF disposes of assets;
  • QOF Level Dispositions and Reinvestment – QOFs will have a one-year grace period to sell assets and reinvest the proceeds without triggering penalties;
  • The Working Capital Safe-Harbor – the working capital safe-harbor now applies to working capital designated for the development of a trade or business in the OZ;
  • Trade or Business Definition – the types of activities that constitute a trade or business of a qualified OZ business have been clarified, including certain leasing activities;
  • The 50% Test – the sourcing of gross income to the qualified OZ business in a taxpayer-friendly way, which should provide comfort to taxpayers setting up operating businesses in an OZ;
  • Leveraged Distributions – ordinary course leveraged distributions from partnership QOFs are generally permissible without causing an inclusion event, subject to partnership basis adjustment rules and a general anti-abuse rule; and
  • Original Use – original use commences when the person or prior person first places the property in service in the OZ for purposes of depreciation or amortization.  Buildings vacant for at least five years may satisfy the original use test.