Hearing on Proposed Qualified Opportunity Zone Regulations – Requests for Greater Flexibility

On February 14, 2019, the Internal Revenue Service (IRS) and the Department of the Treasury (Treasury) held a hearing on the proposed regulations for the Qualified Opportunity Zone (QOZ) program (the Proposed Regulations), which were released on October 19, 2018. More than 20 witnesses provided comments and recommendations on a variety of topics, generally stressing a desire for greater flexibility under the Proposed Regulations.

Suggestions included:

  1. Relaxing the proposed 50% gross income test – which requires that 50% of the gross income of an opportunity zone investor be derived from the respective zone –in order to allow consideration of income generated outside of the opportunity zone
  2. Relaxing the timing of investments and reinvestments, both by investors into Qualified Opportunity Funds and by Qualified Opportunity Funds into Qualified Opportunity Zone businesses
    • Witnesses stressed that Congress intended reinvestment of interim gains without sacrificing the tax benefit or increasing the holding period requirement. Moreover, the witnesses requested that the regulations permit a reasonable period to reinvest that reflects investment practices
  3. Permitting the use of different valuation methods for the 90% asset test and the 70% substantially all test, including unadjusted cost basis
  4. Treating cash as QOZ property for the first 12 months, conditioned on funds being invested within 12 months
  5. Relaxing the proposed substantial improvement test, including:
    • Aggregating assets
    • Providing a safe harbor for reasonable delays
  6. Clarifying how unimproved land is treated and what qualifies as original use property, including a proposal to specify that land or property vacant for at least a year satisfies the original use requirement
  7. Ensuring investments in operating businesses are supported as well as investments in real estate, including providing operating businesses more time to qualify as Qualified Opportunity Zone businesses
  8. Including long-term ground leases as Qualified Opportunity Zone property with a basis of zero
  9. Establishing clear reporting standards to track the performance of the qualified opportunity zone program

The IRS also noted that it is continuing to work on a second Notice of Proposed Rulemaking that it will publish shortly.

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