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Treasury Department Publishes Second Round of Regulatory Guidance on Opportunity Zones

Drew Clark

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The U.S. Treasury Department on Wednesday published its second round of regulatory guidance regarding opportunity zones, providing further context and security around the investment vehicle included in the 2017 federal tax legislation, dubbed the Tax Cuts and Jobs Act.

As defined in law, the statutory opportunity zone systems allows a taxpayer to defer all or part of a gain that would otherwise be taxable if it is invested into either a qualified opportunity fund, or into a business operating in an opportunity zone.

Under the 2017 tax law, governors in all 50 states (and U.S. territories and districts) have designed opportunity zones, generally in low-income or otherwise economically-disadvantaged areas.

That gain is deferred until the investment is sold or on December 31, 2026, whichever comes sooner. In an investment is held for at least 10 years, the investor may be able to permanently exclude their gain.

The regulations issued on May 1, 2019, are separated into seven sections, Proposed Treasury Regulation section 1.1400Z2-1(a) through 1.1400Z2-1(g). The rules impact everything from investing capital gains into QOFs, structuring basis issues related to investment in QOFs, investing in the opportunity zones by the QOF, operating within the opportunity zones, and rules about exiting the opportunity zone.

The Treasury Department issued its first set of regulations in October 2018. They provided basic rules and definitions of eligible taxpayers, eligible gains, QOF self-certification, and special rules for qualified opportunity zone business assets.

This second set of regulations provides clarity on the interaction of partnership rules, strategies to exit or unwind an investment from a QOF, or from a qualified opportunity zone business.

The idea behind the opportunity zones concept is that investors, seeking tax benefits, will accelerate business, real estate and broadband investment.

The significance of the opportunity zones investment vehicle has been slow to dawn on developers and broadband advocates. But many in the broadband development space now see the opportunity zones regulations as one of a handful of new government-supported investment vehicles providing stimulus toward greater broadband investment.

(Image from New York Fed.)

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