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IRS Revenue Ruling 2018-29: Special Rules for Capital Gains Invested in Opportunity Zones, October 2018

Published on October 19, 2018

On October 18, 2018, the Treasury Department released proposed regulations providing guidance on the Opportunity Zone (OZ) provisions of Internal Revenue Code section 1400Z-2. The proposed regulations address the type of gains that may be deferred by qualified opportunity fund (QOF) investors, the time by which corresponding amounts must be invested in QOFs, and the manner in which investors may elect to defer specified gains. The regulations also provide rules for self-certification, valuation of QOF assets, and guidance on qualified opportunity zone businesses.

Among the many tax issues addressed, the proposed regulations clarify that only capital gains, not ordinary gains, are eligible for deferral under section 1400Z-2.  The regulations also propose excluding the value of land from a property’s adjusted basis for purposes of meeting the substantial improvement test referenced in the OZ statute.  This rule should significantly expand the number of eligible properties that can take advantage of the OZ incentive.

Treasury will accept comments on the proposed regulations for 60 days, and expects to issue additional OZ guidance later this year.

The Department also released Revenue Ruling 2018-29, accessible below, with additional details on the substantial improvement test referenced above.

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