Opportunity Zones Final Regulations–A Detailed Look

Published by John Sciarretti, Michael Novogradac on Wednesday, January 15, 2020 - 12:00am

[Updated: 2020-1-24 10:10 a.m. - Note added about applicability based on Treasury statements on Jan. 23.]

The release of opportunity zones (OZ) final regulations Dec. 17, 2019, brought some notable surprises to the OZ community: some pleasant, some not so pleasant and some extremely disappointing. Treasury’s final regulations confirmed some commonly held interpretations and overturned some others.

This blog post is an overview of some of the key changes to the proposed regulations, as released in October 2018 and updated in May 2019. This is an abridged version that focuses on a few of the issues in multiple categories–investors, qualified opportunity funds, qualified OZ businesses and qualified OZ business property. Members of the Opportunity Zones Working Group have access to a longer version. To gain access, consider joining the working group.

This post assumes a working technical tax knowledge of the OZ incentive as it addresses the regulations–with 355 pages of preamble and 189 pages of guidance, a combined length of 544 pages. Again, these are a deeper dive into a few of the issues addressed in the regulations.

General Applicability–by Section


The final regulations are generally applicable for taxable years beginning 60 days after the regulations were published in the Federal Register, which is March 13, 2020. This means the regulations are not universally applicable to calendar year taxpayers until 2021.

However, taxpayers can choose early application of the final rule if applied in a consistent manner for all such taxable years. Taxpayers may also choose to rely on each section of the proposed regulations published Oct. 29, 2018, and May 1, 2019, in the Federal Register, but only if relied upon in a consistent manner for all such taxable years. Taxpayers do not appear to have the option to rely on the proposed regulations published Oct. 29, 2018, unless they also incorporate the May 1, 2019, updates to the proposed regulations. It also appears that taxpayers cannot choose to apply some of the proposed regulations sections without applying them all. It is also unclear how a taxpayer documents their reliance on proposed or final regulations.

(Note: an attorney-adviser in the Treasury Department's Office of Tax Policy told Bloomberg Tax Jan. 23 that investors can rely on final rules, certain sections of proposed rules or their own interpretation, but that those who adhere to sections of the proposed rules must do so consistently.)

Following are some key issues in each of the areas addressed by the regulations.


One investor issue addressed in the regulations is gains eligible for deferral (eligible gains). Other issues–including measuring the 180-day rule for partners, deferred gain recognition in 2026, 10-year fair market value (FMV) basis step-up and gain exclusion elections, consolidated group rules, related person limitations, transfer of QOF interests in divorce or inheritance, annual investor reporting, carried interests and foreign and tax-exempt investors–are covered in the lengthier post available to working group members.

Eligible Gains

IRC Section 1231 Gains

The final regulations provide that gross IRC Section 1231 gains are eligible gains, which means an investor does not need to have overall Section 1231 net gains to invest such gains, and investable Section 1231 gains are not reduced by Section 1231 losses. The post-aggregation recapture provision requiring the net Section 1231 gain for any taxable year to be treated as ordinary income to the extent that such gain does not exceed the non-recaptured net Section 1231 losses still applies. However, any gain deferred is not taken into account for purposes of this rule until it is included in income at a later date.

Interestingly, by excluding Section 1231 gains, any Section 1231 losses become ordinary losses that may never be recaptured.

The final regulations also start the 180-day clock on Section 1231 gains on the date of the sale or exchange, as opposed to the end of the investor’s tax year, as provided in proposed regulations. The net result of this rule is more gain from the sale of property used in a trade or business will be eligible for investment in OZs at an earlier time.

Installment Sales

Eligible gains include gains reported under the installment method, including gains realized from an installment sale that occurred before Dec. 22, 2017. The final regulations allow the 180-day period to begin either on the date the payment on the installment sale is received or the last day of the taxable year in which the eligible taxpayer would have recognized the gain under the installment method. A taxpayer seeking to invest gain from an installment sale during the 180-day period from the date of the sale would need to elect out of the installment sale method.

Qualified Opportunity Funds

There are a series of issues for QOFs addressed in the final OZ regulations. We will address the grace period to begin a trade or business here, but in the longer version of the blog available to OZ working group members, we also address sin businesses, testing qualified OZ businesses, qualified OZ business cure period, mergers of QOFs, treatment of recently contributed property, debt-financed distributions and other issues.

Grace Period to Begin Trade or Business

Final regulations provide a grace period to begin a trade or business for a QOF substantially improving an asset, but no grace period is provided for new construction or starting an operating business. The lack of a grace period for new construction and new operating businesses will greatly limit the ownership of qualified OZ business property by QOFs, as compared to qualified OZ businesses. The preamble of the final regulations states that this rule also applies to qualified OZ businesses, but the final regulations text appear to limit this grace period to QOFs.

Qualified Opportunity Zone Businesses

The final regulations address several qualified OZ business issues such as the working capital safe harbor, sin businesses, triple net leases and intangible property. We will address triple net leases here, with the others covered in the lengthier post available to OZ working group members.

Active Trade or Business–Triple Net Leases

While “merely entering into a triple net lease with respect to real property owned by a taxpayer does not constitute the active conduct of a trade or business,” Treasury and the IRS say in the preamble that, in certain cases, a taxpayer that uses a triple net lease as part of the taxpayer’s leasing business could be treated as conducting an active trade or business. The final regulations provide an example in which a lessor leases a three-story, mixed-use building to three tenants, each of which rents a single floor, and one of the floors is subject to a triple net lease. The lessor is treated as carrying out an active trade or business with respect to the entire building leased.

Qualified OZ Business Property

Among qualified OZ business property issues addressed in the final regulations are those included in original use, substantial improvement, leased property, unimproved land, related party fees and property purchases, property in multiple OZs, self-constructed property and treatment of inventory.  We will address original use here, with the other topics covered in the OZ working group version of the blog.

Original Use–Placement in Service

Treasury did not adopt a request that taxpayers be able to rely on certificates of occupancy for determining whether a property satisfies the original-use requirement. Treasury and the IRS noted that standards applicable to certificates of occupancy vary by jurisdiction and therefore fail to provide a uniform standard. The regulations do, however, provide an example of a QOF acquiring a newly constructed hotel before the developer had placed the hotel building in service for purposes of depreciation, and conclude that the QOF is treated as satisfying the original-use requirement.

Other original use issues, as well as the other qualified OZ business property issues mentioned earlier, are addressed in the longer post.


The final OZ regulations are substantive and provide broad direction for those participating in the incentive. The OZ Working Group will continue to address issues where additional guidance, clarity and a common understanding is needed.