Search Our Website:

On December 19, U.S. Department of the Treasury issued 544 pages of explanatory text and final regulations on the opportunity zone ("OZ") program. These regulations have been long awaited and are, not surprisingly, detailed and complex.

For the most part, the changes made in the final regulations are helpful to OZ investors, but there are also instances in which the answer provided is not the answer practitioners and taxpayers were hoping for. There are also questions that Treasury has chosen not to address.

First Look at Important Changes Made by the Final OZ Regulations

Exit Strategy

The regulations provide that Qualified Opportunity Fund ("QOF") investors in a QOF partnership or QOF S corporation that have held their qualifying investment in the QOF for at least 10 years can elect to exclude all gain (other than gain from the sale of inventory in the ordinary course) on the sale of property by a QOF or Qualified Opportunity Zone Business ("QOZB") – in other words, the regulations have fixed the exit issue by allowing the sale of assets at the QOZB level (the proposed regulations required either a sale of assets at the QOF level or a sale of the QOF investor’s interest in the QOF in order to take advantage of the gain exclusion after 10 years).

Eligible Gains

The regulations fixed the §1231 issue by allowing taxpayers (including pass-through entities) to defer gain recognized with respect to §1231 property (in excess of the amount of any gain required to be recognized as ordinary income under §§1245 and 1250, the recapture rules). The final regulations, unlike the proposed regulations, allow the deferral of gross eligible §1231 gain and do not require a taxpayer to net that gain against §1231 losses. In addition, the final regulations do not require taxpayers to wait until the end of the taxable year to begin their 180-day period for investment of §1231 gain into a QOF. The regulations also clarify that installment sale gain is eligible for deferral, including gain recognized from an installment sale that occurred prior to December 22, 2017, and provide taxpayers with a choice regarding the appropriate 180-day period within which to invest the gain.

Substantial Improvement Rule – Asset Aggregation

The regulations provide the following asset aggregation rules with respect to the substantial improvement requirement: (1) when determining whether a piece of property has been substantially improved, the cost of original use property that is located in the same zone (or a contiguous zone), that is used in the same trade or business and that improves the functionality of the property being improved can be included for purposes of determining whether basis has been doubled; (2) buildings that are part of an “eligible building group” can be aggregated for purposes of applying the substantial improvement requirement. 

Application of the Market-Rate Requirement to Leases

The regulations provide a rebuttable presumption that leases between unrelated parties are market-rate and allow for leases with state and local governments and Indian tribal governments that are not market-rate.

Original Use Property – Vacancy

The regulations relax the vacancy requirement; a 3-year vacancy is sufficient to treat real property as original use property and avoid the substantial improvement test. In certain cases, a 1-year period is sufficient. Real property is considered vacant if more than 80 percent, as measured by the square footage of usable space, is not currently being used.


The regulations provide that all property that is part of a brownfield site (including land and structures) is considered original use property (i.e., no substantial improvement requirement) as long as, within a reasonable period of time, investments are made to ensure that the property meets basic safety standards for both human health and the environment. In addition, brownfield remediation will be considered “more than insubstantial” improvement of land.


For purposes of both the 90 percent asset test at the QOF level and the 70 percent tangible property test at the QOZB level, an entity may choose to exclude from both the numerator and denominator of the applicable test the value of all inventory (including raw materials) of the trade or business, as long as the choice is applied consistently for the taxable year.

Property in Process of Being Substantially Improved

The final regulations provide that for both QOFs and QOZBs, tangible property that is undergoing the substantial improvement process is treated as used in a trade or business and satisfies the requirements of the 30-month substantial improvement test. In other words, the QOF or QOZB does not need to wait until the improvements are completed to treat the property as “good” property for purposes of the 90 percent or 70 percent tests. This rule applies as long as the QOF or QOZB reasonably expects that the property will be substantially improved and used in a trade or business by the end of the 30-month substantial improvement period.

New 62-Month Safe Harbor for Tangible Property

The regulations provide a new 62-month safe harbor pursuant to which a QOZB can choose to apply subsequent 31-month working capital safe harbors to tangible property for a maximum 62-month period. The subsequent infusion(s) of cash must be an integral part of the plan covered by the initial 31-month period.

Guidance on Triple Net Leases

Although the regulations do not contain a definition of a triple net lease, in the example provided, the lessee is responsible for all of the costs related to a leased building (e.g., paying all taxes, insurance, and maintenance expenses) in addition to paying rent, and the lease is considered triple-net. In the example, a triple net lease to a single tenant is not the active conduct of a trade or business, regardless of whether the lessor maintains an office in the leased space to address issues that may arise with the lease. However, if a lessor leases a portion of a building on a triple-net basis and other portions under leases that are not triple-net and the lessor maintains an office in the building with employees who are managing and operating the spaces that are not triple net-leased, this will be considered the active conduct of a trade or business.

70-Percent Use Test

The “substantially all” threshold with respect to both the required amount and use of tangible property owned or leased by a QOZB is 70 percent. The regulations provide additional guidance on how to apply the 70-percent use test. Property satisfies this test if, based on the number of days between two consecutive QOF testing dates, not less than 70 percent of the total use of the property occurs at a location within a qualified opportunity zone. The regulations provide safe harbors for (1) tangible property used in rendering services inside and outside of a zone; and (2) short-term leased tangible property.

Intangibles Test

The regulations provide guidance on the intangibles test applicable to QOZBs. The regulations provide that intangible property will be treated as used in the active conduct of a trade or business in a qualified opportunity zone if (1) the use of the intangible property is normal, usual or customary in the conduct of the trade or business; and (2) the intangible property is used in the qualified opportunity zone in the performance of an activity of the trade or business that contributed to the generation of gross income for the trade or business.

Sin Businesses

The regulations provide that a business that leases more than a de minimis amount of property to a sin business is not a qualified business. The regulations also clarify that the prohibition on sin businesses does not apply to a QOF – it only applies to a QOZB.

New 6-Month Cure Period for QOZBs

The regulations provide one 6-month cure period for a QOZB that fails to meet the requirements. If a QOZB fails the requirements on a QOF’s testing date, the QOF is able to treat its interest in the QOZB as qualified property as long as the QOZB corrects the failure within 6 months.

Decertification of a QOF

The regulations allow for self-decertification by a QOF but do not provide guidance on when a QOF may be involuntarily decertified.

When Are the Final Regulations Effective?

The regulations are generally effective for taxable years beginning after the date that is 60 days after the regulations are published in the Federal Register. For taxable years beginning on or before that date (during which the OZ rules could have been applied), taxpayers have been given a choice to either apply the final regulations (in their entirety) or the proposed regulations (in their entirety, with very limited exception).

The Opportunity Zone Practice Group at Buchanan Ingersoll & Rooney continues to analyze the guidance in the final regulations. We are available to help you navigate these new rules and determine whether and how they affect opportunity zone transactions.