The final regulations dealing with Qualified Opportunity Zone Funds have been released by the IRS.[1] Note that the copy released by the IRS has the following caveat:

This document will be submitted to the Office of the Federal Register (OFR) for publication. The version of the final rule released today may vary slightly from the published document if minor editorial changes are made during the OFR review process. The document published in the Federal Register will be the official document.[2]

The IRS also released a five page frequently asked questions (FAQ) document on the final regulations.[3] One major change found in the final regulations is highlighted early in the FAQ relates to business gains:

Sales of business property — The proposed regulations only permitted the amount of an investor’s gains from the sale of business property that were greater than the investor’s losses from such sales to be invested in QOFs, and required the 180-day investment period to begin on the last day of the investor’s tax year. The final regulations allow a taxpayer to invest the entire amount of gains from such sales without regard to losses and change the beginning of the investment period from the end of the year to the date of the sale of each asset.[4]

Also highlighted is a modification on the timing of the beginning of the 180-day period for gains flowing to a partner from a partnership:

Partnership gain — Partners in a partnership, shareholders of an S corporation, and beneficiaries of estates and non-grantor trusts have the option to start the 180-day investment period on the due date of the entity’s tax return, not including any extensions. This change addresses taxpayer concerns about potentially missing investment opportunities due to an owner of a business entity receiving a late Schedule K-1 (or other form) from the entity.[5]

The FAQ highlights a clarification for reinvestment of mutual fund (registered investment company or RIC) and REIT gains:

Investment of Regulated Investment Company (RIC) and Real Estate Investment Trust (REIT) gains — The rules clarify that the 180-day investment period generally starts at the close of the shareholder’s tax year and provides that gains can, at the shareholder’s option, also be invested based on the 180-day investment period starting when the shareholder receives capital gains dividends from a RIC or REIT.[6]

As well, a taxpayer friendly clarification on the impact on installment sales is also found in the FAQ:

Installment sales — The rules clarify that gains from installment sales are able to be invested when received, even if the initial installment payment was made before 2018.[7]

The FAQ also highlights a taxpayer-friendly change in the final regulations regarding which gains can be excluded from income once the 10-year period has expired:

Sales of property by a Qualified Opportunity Zone Business (QOZB) — In the proposed regulations, an investor could only elect to exclude gains from the sale of qualifying investments or property sold by a QOF operating in partnership or S Corporation form, but not property sold by a subsidiary entity. The final regulations provide that capital gains from the sale of property by a QOZB that is held by such a QOF may also be excluded from income as long as the investor’s qualifying investment in the QOF has been held for 10 years. However, the amount of gain from such a QOF’s or its QOZBs’ asset sales that an investor in the QOF may elect to exclude each year will reduce the amount of the investor’s interest in the QOF that remains a qualifying investment.[8]

The FAQ also highlights the ability to exclude certain other gains under the final regulations.

Applicability to other gains — The final rules clarify that the exclusion is available to other gains, such as distributions by a corporation to shareholders or a partnership to a partner, that are treated as gains from the sale or exchange of property (other than inventory) for Federal income tax purposes.[9]

The FAQ concludes with two other sections based on the following questions:

How does a Fund determine levels of new investment in a Qualified Opportunity Zone?
How can large C Corporations invest in Opportunity Zones?

[1] IRS release of TD 9889, released by Department of Treasury on December 19, 2019, https://www.irs.gov/pub/irs-drop/td-9889.pdf (retrieved December 22, 2019)

[2] IRS release of TD 9889, p. 1

[3] Final Regulations on Opportunity Zones: Frequently Asked Questions, Department of the Treasury, December 19, 2019, https://home.treasury.gov/system/files/136/Treasury-Opportunity-Zone-Final-Regulations-FAQ-12-19-19.docx (retrieved December 22, 2019)

[4] Final Regulations on Opportunity Zones: Frequently Asked Questions, p. 1

[5] Final Regulations on Opportunity Zones: Frequently Asked Questions, p. 1

[6] Final Regulations on Opportunity Zones: Frequently Asked Questions, p. 1

[7] Final Regulations on Opportunity Zones: Frequently Asked Questions, p. 1

[8] Final Regulations on Opportunity Zones: Frequently Asked Questions, p. 2

[9] Final Regulations on Opportunity Zones: Frequently Asked Questions, p. 2