7 Most Frequently Asked Questions About Opportunity Zones

Qualified Opportunity Zones were included as part of the Tax Cuts and Jobs Act which became law in December 2017. The zones were originally introduced as the Investing in Opportunity Act sponsored by South Carolina Senator Tim Scott and are meant to encourage investment in economically distressed communities.

Opportunity Zones have generated a lot of interest and even more questions. This alert attempts to answer the most frequently asked questions we are hearing from clients.

1. What is the opportunity?

   The opportunity is for investors with long-term capital gains to defer paying tax on those gains for a period of time while also investing in underserved communities that need capital.

2. Where are we in the process? What has happened so far?

   Legislation creating the Opportunity Zones and setting forth the associated tax benefits has been passed. The deadline for state governors to propose the census tracts to be designated as Opportunity Zones was March 21, 2018. On April 9, the U.S. Treasury Department and the IRS validated census tracts in 18 states and territories.

3. What's next in establishing Opportunity Zones and Opportunity Funds?

   The U.S. Treasury Department is tasked with promulgating regulations defining and refining certain requirements set forth in the legislation. Those regulations are expected this summer and are anxiously awaited as the deferred tax arising out of the Opportunity Zone investments will come due no later than the tax year ending December 31, 2026. Thus the earlier an investment is made, the longer the tax can be deferred.

4. Who should be most interested in Opportunity Zones?

   Anyone with long-term capital gains they want to defer should be interested in Opportunity Zones. Investments in Opportunity Zones are made through Qualified Opportunity Funds. When the legislation was passed, most analysts believed the certification of Opportunity Funds would be performed through a structured process, perhaps administered by the Treasury Department's Community Development Financial Institutions (CDFI) Fund.

   However, in a series of frequently asked questions published by the IRS on April 24, 2018, the Service said a Qualified Opportunity Fund can self-certify and "no approval or action by the IRS is required."

   If this holds true, individuals with smaller gains may be able to reinvest them without having to worry about potential costs associated with investing in a larger, institutionally-managed fund. This process could...