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January 2, 2020

Stroock Special Bulletin

By: Jeffrey D. Uffner, Michelle M. Jewett, Brian J. Senie, Richard G. Madris, Kevin Matz

On December 19, 2019, the United States Treasury Department and the Internal Revenue Service (the “IRS”) finalized regulations (the “Final Regulations”) that provide guidance on the Qualified Opportunity Zone (“QOZ”) provisions that were added as Sections 1400Z-1 and 1400Z-2 of the Code[1] (such Sections, the “QOZ Statute”) by the tax reform legislation enacted in December 2017 (such provisions, as modified or interpreted by Treasury Regulations or other IRS guidance, the “QOZ Rules”).

The Final Regulations modify two sets of proposed regulations: an initial set of proposed regulations,[2] along with a companion revenue ruling, promulgated in October 2018 (the “First Proposed Regulations”),[3] and a second set of proposed regulations[4] promulgated in April 2019 (the “Second Proposed Regulations,” and together with the First Proposed Regulations, the “Proposed Regulations”).

Specifically, the Final Regulations:

  • incorporate many of the provisions from the Proposed Regulations without modification;
  • provide additional guidance on many issues raised by commenters;
  • contain, in the Preamble, an extensive discussion of underlying considerations weighed by the Treasury Department and the IRS in drafting the Final Regulations; and
  • add numerous illustrative examples of provisions in the Final Regulations.

In this Stroock Special Bulletin, we highlight and discuss the more significant aspects of the Final Regulations, including provisions affecting (1) the effective date and applicability of the Final Regulations; (2) multi-asset Qualified Opportunity Funds (“QOFs”); (3) QOZ Business (“QOZB”) qualification and QOZ Business Property (“QOZBP”); and (4) rollover of gain and 180-day periods for investors.

Effective Date / Applicability

The Final Regulations apply to taxable years beginning on or after the date that is sixty (60) days after their publication in the Federal Register.  Assuming a publication in 2020 (or, at any rate, that sixty days after their publication will be a date in 2020), calendar-year taxpayers will be subject to the Final Regulations for taxable years beginning on or after January 1, 2021.  For taxable years beginning prior to such date (i.e., through and potentially including 2020), taxpayers may choose, at their election, to either (1) rely on the Proposed Regulations, if they do so consistently and in their entirety, for all such taxable years, or (2) rely (solely and consistently) on the Final Regulations for such years.


The provisions in the Final Regulations are generally more favorable to taxpayers; however, as discussed in several sections below, certain provisions of the Final Regulations may be more restrictive for taxpayers in certain scenarios.  In addition, as of the date of this bulletin, the Final Regulations have not yet been published in the Federal Register.  Accordingly, the decision whether to rely on the Final Regulations or the Proposed Regulations will require close attention, particularly regarding decisions made with respect to the 2019 taxable year.

Multi-Asset QOFs

Direct Asset Sales by QOZBs Permitted

One of the major benefits under the QOZ Rules is the ability for an investor to increase its basis in a QOF interest to fair market value upon a sale or disposition if the interest is held for ten or more years (the “10-year Benefit” under Code Section 1400Z-2(c)), effectively eliminating post-acquisition gain on the ultimate disposition.  The statutory language applies the 10-year Benefit only to a disposition by the investor of its interest in the QOF, which would potentially preclude a tax-efficient sale (i) by a QOF of an individual QOZB or (ii) by a QOZB of individual assets.  The First Proposed Regulations did not address these potential exit scenarios.  The Second Proposed Regulations provided that sales of a QOZB by a QOF were permissible, but did not specifically address sales of assets by a QOZB; moreover, the Treasury Department specifically provided that taxpayers could not rely on that particular provision of the Proposed Regulations.

The Final Regulations expressly permit both sales by a QOF of interests in a QOZB and direct asset sales by a QOZB without compromising the 10-year Benefit available to investors.  This result is obtained by providing for a basis step-up in the underlying QOZB or asset that would otherwise be available in connection with a sale by an investor of its QOF interest.  However, in order to prevent a duplication of benefits on assets or sale proceeds received by the QOF or QOZB, the Final Regulations provide for the following treatment: (i) the QOF is treated as distributing to the QOF investor its share of proceeds from the sale of or sale by (as applicable) the QOZB on the last day of its taxable year; (ii) the investor is treated as contributing such proceeds back to the QOF; and (iii) this contribution is not treated as a contribution of the proceeds from a qualifying rollover investment, such that the investor would have a so-called “mixed-use” investment in the QOF.  The percentage of the investor’s investment in the QOF that will become ineligible for further QOZ benefits is based on the relative value of the assets that were sold to the value of all other assets on the deemed distribution date.


The Final Regulations confirm that a QOF can be structured as a multi-asset fund owning multiple QOZBs, thereby answering a question in the minds of many practitioners since the QOZ Statute’s enactment.  In other words, the QOF can resemble a traditional multi-asset private equity fund and potentially provide for a sponsor promote/carried interest determined based on the collective performance of the various QOZBs held by the QOF.  Although the Proposed Regulations contained provisions that appeared to permit a multi-asset structure, those provisions could not be relied upon and thus many QOFs were still structured around parallel vehicles.  In addition, the Final Regulations clarify that a sale of assets by a QOZB will qualify for the 10-year Benefit.  Since asset sales are typically easier to consummate than entity sales, this clarification is expected to facilitate exit strategies for QOFs.

Contributions of QOF Interests

Consistent with the Proposed Regulations, the Final Regulations provide that a Code Section 721 contribution of a QOF interest to a partnership does not constitute an inclusion event, and provides rules governing the ongoing tax treatment in such a scenario.  Such rules provide that the transferee partnership becomes the taxpayer making elections regarding the QOF interest, and any tax consequences pertaining to such interest generally flow directly to the partner who contributed such interest.  Accordingly, it would seem that a partnership could hold multiple QOF interests on behalf of multiple partners.  However, it should be noted that the Preamble to the Final Regulations specifically states that offering the ability to invest in a QOF through an “aggregator” entity would be inconsistent with the QOZ Statute, and that QOF investors must invest their rollover gain directly into a QOF.


Although the Preamble expressly rejects the ability to create “aggregator vehicles,” the ability to contribute QOF interests to other entities would appear to provide an alternative mechanism for achieving the same result.  How the two concepts can be reconciled, and the practicability of effecting a Section 721 rollover in the context of a widely-held QOF, are currently unclear.  Additionally, it should be noted that the apparent inability to use a feeder vehicle prior to the initial investment in the QOF provides at least some limitation on the practical benefits of aggregating investors in a single entity.

QOZB Qualification, QOZB Property

A significant component of the QOZ Rules pertains to the qualification of property as Qualified Opportunity Zone Business Property (“QOZBP”) in the hands of a QOZB.  Notably, at least 70% of a QOZB’s tangible property must be QOZBP, which, among other requirements, must be acquired by purchase, from an unrelated party, after 2017, and must be originally used in the QOZ by the QOZB (the “Original Use Test”) or be substantially improved by the QOZB (the “Substantial Improvement Test”).  The Substantial Improvement Test generally requires a QOZB to make sufficient improvements to the property so as to double the property’s basis over a 30-month period.  The Final Regulations provide additional guidance on these QOZBP requirements as set forth below.

Sales to QOZBs Recast as Contributions

In a new (and potentially significant) development, the Treasury Department has made clear in the Preamble to the Final Regulations that it will likely apply step-transaction principles to recharacterize certain sales of property to a QOF or QOZB as a contribution of that property where the seller invests the proceeds of such sale into the QOF or QOZB as part of the same overall plan.  As a result, the property would not be acquired by purchase and, as such, would not constitute QOZBP in the hands of the QOZB, and the purported seller would not recognize gain eligible for QOZ rollover.

Related-Party Considerations

 The IRS also indicated in the Preamble that it may use the step-transaction doctrine to analyze transactions in which a seller later becomes a party related to the QOF or QOZB (under the 20% relatedness standard set forth in the QOZ Rules), to potentially recharacterize the initial sale to the QOZB as a sale by a related party.  Although the Final Regulations provide some guidance in the context of allocating between interests (including profits interests) in a mixed-use fund, the Final Regulations do not address how a profits interest would be treated for purposes of determining whether a seller is or would become a related party.


Having a purported sale recharacterized as a contribution or a related-party acquisition would have significant consequences for the qualification of a QOZB.  Because the asset acquired by the QOZB would not qualify as QOZBP, the QOZB may not be able to satisfy its 70% asset test for tangible property.  The investment by the seller would also not generate eligible gain that would qualify for rollover treatment or QOZ benefits.  Accordingly, care must be taken to avoid a step-transaction recast, perhaps by investing the rollover proceeds through different entities.  Additionally, in structuring QOFs or QOZBs in which a seller of property will remain a direct or indirect investor, taxpayers may want to ensure that the seller has less than a 20% maximum interest throughout the life of the QOF or QOZB to avoid related-party issues (which will look through to the underlying ownership).  Finally, as many of the above considerations are based on comments in the Preamble that reference the step-transaction doctrine (an established common-law tax doctrine) it is not clear that a taxpayer can avoid the application of such doctrine by relying on the Proposed Regulations rather than the Final Regulations.

Permissible QOZBP

The Final Regulations clarify that property constructed by a QOZB (i.e., self-construction) for use in the QOZ will qualify as “acquired by purchase” for purposes of the applicable tests.  Although many practitioners believed this to be the intended result even under the Proposed Regulations, confirmation is reassuring since many QOZ transactions involve ground-up developments by the fund sponsor.  The Final Regulations also include provisions governing the time at which self-constructed property may be treated as “acquired” for purposes of these tests, and its treatment as “used” in the trade or business during the time of construction.

Additionally, the Final Regulations clarify that a QOZB may purchase a complete or near-complete building and put it in service in a QOZ.  Practitioners had raised concerns that a complete or near-complete building might be treated as already in service or that acquiring such a building might run counter to the intended purposes of the QOZ Rules.  The Treasury Department and IRS clarified that this type of acquisition is permissible for a QOZB, and that any post-2017 construction of a building in a QOZ (even if not by the QOZB that acquires it) generally supports the legislative intent of the QOZ Statute.


These clarifications provide positive relief, since many QOF transactions are centered around either self-constructed property or purchases of near-complete projects.

Vacancy Rule

The Proposed Regulations provided a rule under which property that had been abandoned or otherwise left vacant for a period of 5 years or longer could be treated as “originally used” by a QOF or QOZB for purposes of the Original Use Test.  The Final Regulations provide additional leeway by modifying this rule such that property qualifies under this provision if it is vacant for only 3 years (or only 1 year if it was vacant prior to the designation of its location as a Qualified Opportunity Zone).  The Final Regulations also provide for a safe harbor test under which a property will be treated as vacant if 80% or more of it, by square footage, is unused.


The reduction of the vacancy period to 3 years, from 5, conforms with the rule applied in the somewhat analogous Empowerment Zones provisions, and better aligns with the commercial realities of the market.  The Treasury Department considered a further reduction to only 1 year, but stated in the Preamble that it did not want QOFs to abuse this leniency by purchasing pre-existing property, holding it vacant for 1 year, and then placing it in service.  Accordingly, the 1-year scenario is restricted to property vacant prior to QOZ designation.

Substantial Improvement

The Final Regulations provide a rule by which property that is in the process of being substantially improved may be treated as used in a trade or business (for purposes of the QOZB tests) for the 30-month period during which the property is substantially improved.

Additionally, the Final Regulations permit limited aggregation for purposes of the Substantial Improvement Test in the following two ways:

Aggregation of Components

Under certain circumstances, assets that are purchased for “original use” (under the Original Use Test) by the QOZB may count for purposes of the Substantial Improvement Test requirement if the assets are used in the same trade or business as the property being substantially improved and improve the functionality of such property.

Aggregation of Properties

The Final Regulations also permit buildings to be aggregated for purposes of the Substantial Improvement Test, such that (i) all buildings within a parcel described by a single deed may be treated as a single property, and (ii) all buildings within a contiguous parcel not described by a single deed may nevertheless be treated as a single property if (1) the buildings are operated exclusively by the QOZB; (2) the buildings share facilities or significant centralized business elements; and (3) the buildings are operated in coordination with, or reliance upon, one or more of the trades or businesses of the QOZB.


The Final Regulations eliminate a concerning ambiguity on whether property that is being developed or in the process of being substantially improved would satisfy the trade or business requirement.  In addition, the ability to aggregate components or properties facilitates the ability to acquire multi-asset projects with different construction needs.

Working Capital Safe Harbor and Non-Qualified Financial Property

The Final Regulations provide certain clarifications and additional helpful guidance regarding the working capital safe harbor for non-qualified financial property held by a QOZB.  Specifically, the Final Regulations provide that the working capital safe harbor, which requires working capital to be used in accordance with a written plan over 31 months, may be applied multiple times with respect to tangible property by a QOZB over an aggregate 62-month period for start-up businesses (which term appears to encompass any new businesses, including real estate) if (i) there are multiple infusions of cash over time that are part of an integrated overall business plan and (ii) each such cash infusion is covered by a separate 31-month working capital safe harbor.

Additionally, the Final Regulations provide safe harbors under which (i) property constructed with properly-held working capital is treated as qualifying QOZBP, and (ii) any income produced by amounts properly held and treated as working capital will qualify for purposes of the gross income test under Code Section 1397C(b)(2).


While the working capital exception has provided a very valuable tool for enabling construction projects, concerns still exist for projects that may take longer than 31 months to complete.  The Final Regulations attempt to allay some of these concerns, as well as concerns over the income generated by a working capital account (including bank-account interest) during the start-up phase of a business.  However, with respect to what constitutes non-qualified financial property generally, the Final Regulations do not provide additional guidance on whether certain leases with prepaid or front-loaded rent that are treated in part as loans, prepaid expenses, prepaid development fees, and options to acquire property would be treated as non-qualified financial property.

It should also be noted that, while the Final Regulations do provide a safe harbor under which property constructed with working capital is treated as qualifying QOZBP, this provision does not appear to treat the actual working capital itself as a qualifying asset that would offset non-qualifying assets.  That is, consistent with the QOZ Statute and Proposed Regulations, a QOZB only obtains QOZBP to the extent that the working capital is expended on tangible property in connection with the written plan, with the remaining working capital cash effectively disregarded for purposes of both the 70% tangible property test and the 5% non-qualified financial property limitation.  The Final Regulations do provide that self-constructed property may be treated as acquired on the date that construction begins, but it is unclear whether this is meant to imply that the full intended value of such self-construction may be treated as acquired on such date, or how this rule is meant to interact with the general rule requiring the actual investment of working capital proceeds.

Rollover Gain and Investments in QOFs

180-day Period – Background

The QOZ Statute provides investors with a 180-day period (the “180-day Period”), from the date of a sale or exchange, to reinvest gain from such sale or exchange into a QOF in order to qualify for benefits under the QOZ Rules.  The Proposed Regulations previously addressed certain circumstances where the 180-day Period had a special application, including circumstances involving investors in a partnership (or other pass-through entity) or investors with so-called “Section 1231” gain (as explained below).  As described below, the Final Regulations provide further guidance on these circumstances, as well as guidance for the 180-day Period with respect to REITs or RICs, and with respect to installment sales.

180-day Period – Partnerships or Other Pass-Through Entities

For investors in a partnership or S-corporation, and for beneficiaries of estates and non-grantor trusts (each, a “Pass-Through Entity”), the Proposed Regulations provided that investors could reinvest their ratable share of gain from the Pass-Through Entity either (i) within 180 days of the actual date of a sale or exchange by the Pass-Through Entity giving rise to such gain, or (ii) within 180 days after December 31 of the taxable year in which the gain was incurred (in large part so that an investor could receive a K-1 informing the investor of its gains).  The Final Regulations maintain both of these options, and add a third option, under which investors may elect to start their 180-day Period for their share of gain from the Pass-Through Entity on the due date (without extensions) of the Pass-Through Entity’s tax return for the taxable year in which the sale or exchange took place (generally, either March 15th or April 15th of the following year).


The addition of this new 180-day Period permits investors in a partnership (or other entities treated as partnerships for federal income tax purposes) additional time to properly identify their gains and make appropriate elections for the respective rollover year, and alleviates concerns about investors receiving late K-1s and so forth.  Additionally, this expanded rule would permit gain recognized at the beginning of a taxable year to be invested into a QOF as late as the second half of the subsequent taxable year, which may provide QOFs with additional time (i.e., potentially an additional testing date’s worth) to find a suitable investment for the capital.

180-day Period – 1231 Gain

The Final Regulations deviate from the Proposed Regulations with respect to gain(s) recognized from the sale of property described in Code Section 1231 (“Section 1231 Property”).  Section 1231 Property is certain property used in a trade or business, such as depreciable property and land, and also includes capital assets subject to an involuntary conversion.  Gains from the sale or exchange of Section 1231 Property (such sales or exchanges, “Section 1231 Transactions”) are characterized as capital gains if the sum of the tax gains and losses of all Section 1231 Transactions for the taxable year is positive.  If the sum of all Section 1231 Transactions for the year is negative, then the losses are ordinary losses.

Because the overall Section 1231 gain or loss is calculated as of December 31 of a given taxable year, the Proposed Regulations provided for an approach consistent with this “netting” under which the 180-day Period for rolling over gains would begin on December 31 of that taxable year (i.e., once all transactions for the year had concluded and net Section 1231 gain or loss could be calculated).  The Final Regulations, however, alter this framework in two important ways.  The first is that Section 1231 gains may now be rolled over on a “gross” basis rather than a “net” basis (so that investors with Section 1231 gains can roll them over irrespective of any Section 1231 losses).  In addition, and consistent with this non-netting approach, the 180-day Period for Section 1231 gain begins on the date of the sale or exchange, and not at the end of a taxpayer’s taxable year.  These rules accord better with the rules applicable to traditional capital gains.  However, they may create potential issues for taxpayers that recognize Section 1231 gains before the changes are fully effective.


The treatment of Section 1231 gains has been a source of much discussion and comment.  The transition from a net gain concept to a gross gain concept, and the timing for making the rollover contribution, creates parity with the rules for gains from pure capital assets.  However, the question arises as to how to apply the Final Regulations to Section 1231 gains recognized in 2019.  Technically, because the Final Regulations do not come into effect until their publication in the Federal Register, the only authority is the Proposed Regulations for 2019 and prior years, which still adhere to a net gain approach with the 180-day Period starting at year-end.  Despite the language in the Final Regulations that would appear to permit investors to rely on them retroactively (if done so consistently), it remains a possibility that investors recognizing 1231 gains on or before June 30, 2019 might only be able to apply the Proposed Regulations because the 180-day Period under the Final Regulations would not be available.  In contrast, other investors in this situation may be advised to make their contribution on December 31, 2019 to ensure maximum QOZ benefits.  Investors will also need to consider whether reliance on the Proposed Regulations for 2019 will require them to also rely on the Proposed Regulations in 2020, and the potential impact thereof.  Although not completely clear, one would expect that an individual taxpayer may choose whether to rely on the Proposed Regulations or the Final Regulations (for this or other purposes) irrespective of whether the QOF into which such taxpayer invests makes the same choice.

180-day Period – REITs and RICs

The Final Regulations clarify that the 180-day Period generally begins at the close of a shareholder’s taxable year, but also provide that a shareholder may choose to have the 180-day Period begin when the shareholder receives capital gains dividends from the RIC or REIT.

180-day Period – Installment Sales

The Final Regulations provide welcome guidance regarding the 180-day Period with respect to gain resulting from an installment sale.  The Final Regulations provide that for gains reported on the installment method, a taxpayer may elect to have the 180-day Period for such gain begin either on the date the payment on the installment sale is received, or the last day of the taxable year in which the taxpayer would have recognized the gain under the installment method.  If the former is chosen, each successive payment will begin a new 180-day Period with respect to that payment.


Prior to the Final Regulations, it was unclear how or whether QOZ Benefits applied to installment gains.  The Final Regulations provide a very favorable approach to their treatment.

Foreign or Tax-Exempt Investors

The Preamble to the Final Regulations clarifies that only gain taxable in the U.S. is able to be rolled over for QOZ purposes.  Accordingly, foreign or tax-exempt investors (to the extent that such status results in gains not subject to U.S. federal income tax) cannot make an investment in a QOF with respect to gain that would not otherwise be subject to U.S. federal income tax.  It would appear, however, that non-U.S. investors could rollover gain that is effectively connected with the conduct of a U.S. trade or business (including under FIRPTA) and U.S. tax-exempt investors could potentially rollover gains that qualify as unrelated business taxable income (“UBTI”).

The Treasury Department noted that partnerships wishing to roll over do not need to conduct the analysis of whether each or any partner is foreign or tax-exempt, as this would be administratively burdensome, but the Final Regulations provide a specific anti-abuse rule targeting partnerships that are intentionally formed to circumvent the prohibition on rollover by foreign or tax-exempt investors.


The Final Regulations clarify that non-U.S. and tax-exempt investors cannot roll over gains from tax-exempt transactions to shelter income from taxable (i.e., FIRPTA/UBTI) investments.  Only taxable gains are eligible for rollover.  This provision also appears to run counter to any hope that the QOZ Rules might be extended to permit investors without taxable gain to nevertheless invest in a QOF to obtain the 10-year Benefit.

Notably, the Preamble to the Final Regulations does not provide specific guidance with respect to a procedure for foreign investors to claim an exemption from withholding tax under Section 1445 or Section 1446.  As a result, purchasers of property sold by foreign persons seeking to roll over applicable gains will still have an obligation to withhold on the gross sale proceeds.  The Treasury Department and the IRS continue to consider documentation options to alleviate the withholding obligation for such gains.

Acquisition of a QOF Interest by Transferee

The Proposed Regulations provided a rule under which a transferee of a QOF interest could treat the purchase as an investment in the QOF to the extent that the transferee had eligible rollover gain.  The Final Regulations clarify and expand this rule by adding that this result applies regardless of whether the transferor had rollover gain or made a rollover election with respect to such gain.  Accordingly, any purchaser of an interest in a QOF may treat it as a qualifying investment in the QOF if the purchaser satisfies the eligible gain, 180-day Period and any other applicable QOZ requirements.

25% Ownership Change for S-Corporations

The Proposed Regulations included a special rule that, for purposes of the QOZ Rules, an S-corporation’s qualifying investment in a QOF would be treated as disposed of if there were a greater-than-25% aggregate change in ownership of the S-corporation.  Following significant commentary on this proposed rule, the Final Regulations do not adopt this special 25% ownership change rule.  Rather, an S-corporation investor should not have an inclusion event for its qualifying investment solely as the result of a disposition of shares by one of the S-corporation shareholders, regardless of the disposition’s magnitude.


The Treasury Department and the IRS, in changing their approach, were receptive to the arguments presented by commenters as to why the rule contained in the Proposed Regulations failed to achieve its purpose of balancing the interests of the S-corporation as owner of the QOF interest while directing gain to the applicable shareholders of the S-corporation.  The prior rule seemed unfair to S-corporation shareholders who did not sell their interest, and the new rule is expected to be well-received.

Basis in QOF Investments

 The Final Regulations clarify that basis adjustments under the 5-year and 7-year benefits (a 10% or 15% increase, respectively) are treated as basis for all purposes of the Code.  Additionally, the step-up provided by the 10-year Benefit, in the case of an interest in a QOF partnership, increases the investor’s basis to the net value of the partnership interest plus the investor’s share of debt, which should generally result in no gain being recognized for the investor on disposition of such interest.


This clarification seems to permit investors to take immediate advantage of their step-up under the 5-year or 7-year benefit, such as by taking operating or deferred losses.  Presumably, to the extent this basis is used to claim losses, it would no longer be available to reduce the amount of gain subject to tax on December 31, 2026.  What remains unclear in the Final Regulations is how the use of this basis would interact with debt basis, i.e., determining what basis is used to take such losses, which determination may be relevant to the amount of deferred gain recognized in 2026.

Various Other Changes and Provisions in the Final Regulations

 The Final Regulations contain a number of additional changes that may be of interest to investors and/or QOF/QOZB managers.  Some of the more relevant provisions, and brief observations, are set forth below.

  • Significantly, a potential six-month cure period for QOZB failures; in the event that a QOZB qualification failure would otherwise cause a QOF to fail to meet the 90% Asset Test for a given testing date, the failure will not be fatal if cured within six months of the failure;
  • Welcome relief for taxpayers operating QOZBs who may be concerned about potential “foot-faults.”
  • Procedures whereby QOFs can de-certify (and the impact of such de-certification on investors);
  • Clarification consistent with the Proposed Regulations that, in accordance with general Subchapter K principles, investors in a partnership QOF may withdraw cash to the extent of basis (from income or indebtedness) without an inclusion event, except if such distribution was part of a disguised sale under the rules of Section 707;
  • There was previously some concern about potential recharacterization of (part of) an investment in a QOF as never having been invested to the extent cash was distributed by the QOF shortly thereafter, even where there was debt basis to support a distribution without triggering an inclusion event.
  • An express statement of the Treasury Department’s view of the purpose of the QOZ Rules, which is “to provide specified tax benefits to owners of qualified opportunity funds to encourage the making of longer-term investments, through qualified opportunity funds and qualified opportunity zone businesses, of new capital in one or more qualified opportunity zones and to increase the economic growth of such qualified opportunity zones.”
  • The anti-abuse provisions and examples refer to this language and to actions that are consistent or inconsistent with these purposes.
  • Ability for investors in a QOF Corporation (but not a partnership) that dispose of a partial interest in the QOF to specifically identify the interests sold, rather than use the FIFO method that was required under the Proposed Regulations;
  • Clarification that, while QOFs may use either audited financial statements or the alternative methodology for valuation, cost basis under the alternative valuation methodology applies only to assets that the QOF (or applicable QOZB) acquired by purchase or constructed for fair market value. For all other assets owned by the QOF or QOZB, fair market value must be used under the alternative methodology;
  • Additional guidance on leased assets, and the addition of a rebuttable presumption that leases between unrelated parties are at market rate;
  • The rebuttable presumption with respect to leases between unrelated parties is sensible because the parties presumably have adverse interests and attempting to document the arm’s-length nature of the lease would present an undue burden to lessees in this context.
  • Treatment of brownfields as qualifying QOZBP assets (as long as they are appropriately remediated in accordance with applicable environmental standards), including important clarifications with respect to satisfaction of the Original Use Test;
  • Adjustments and clarifications to the “gross income” and “intangibles” tests for QOZBs (under Code Sections 1397C(b)(2) and (b)(4) respectively);
  • These include the safe harbor(s) previously discussed. There is a similar safe harbor for intangible assets of a QOZB during start-up phases.
  • Additional guidance and examples regarding whether triple-net or similar leases may constitute a permissible trade or business for a QOZB;
  • The Final Regulations provide an example where the QOZB owns a three-story mixed-use building, one of the floors is leased in a triple-net lease, and the other two floors have leases that are not triple-net. The example concludes that the active trade or business test is satisfied in this example.  However, it still does not clarify whether if a lessor engages in multiple triple-net leases it could ever satisfy the active trade or business standard.  Additional guidance in this regard would be helpful.
  • Clarification that a QOF may directly conduct a “sin business” (under the meaning of Code Section 144(c)(6)(B)), but significant limitations are imposed on the ability of a QOZB (which is not permitted to conduct a “sin business” directly) to lease property to a “sin business”;
  • QOZBs should take note of this limitation, as previously there was no indication that a QOZB engaged in a leasing business would have to pay attention to the business(es) that its lessees would be conducting.
  • Ability for potential QOFs to be entities formed under the laws of US territories or Indian tribes, provided certain requirements are met (primarily, that such entities be subject to U.S. federal income tax);
  • An additional period for the working capital safe harbor of up to 24 months if there is a federally declared disaster;
  • Provisions for capital dividends by a REIT QOF (in connection with investor exit) updated and extended to RIC QOFs;
  • Additional guidance for potential qualification of property that straddles QOZ and non-QOZ tracts;
  • Clarification that organizational and day-to-day operating expenses for a QOF will not create a “cognizable tax asset” and accordingly will not count for purposes of the QOF 90% Asset Test, even if such expenses are reflected as “assets” for accounting purposes;
  • A helpful clarification, as many QOFs will have these expenses.
  • Clarification that an investor in a QOF may sell a portion of the QOF interest and reinvest the proceeds into a new QOF (although perhaps with a restarted holding period) under the applicable provisions from the Proposed Regulations, which, absent this clarification, appeared to have required the investor to sell its entire QOF interest;
  • Additional guidance and Preamble discussion regarding treatment of straddles and 1256 contracts;
  • Guidance on treatment (as potential inclusion events) of QOF entity mergers, contributions and other reorganizations, and reorganizations of QOF shareholders;
  • These restructurings are generally treated as non-inclusion events under the Final Regulations and generally provide for “tacked” holding periods.
  • Changes and clarifications pertaining to the use and treatment of grantor trusts in connection with QOZ investments (which changes may be addressed in further detail in subsequent Stroock bulletins or other communications);
  • Significant guidance on QOZ treatment of entities filing consolidated returns; and
  • Clarification of the eligibility of the built-in gain of a REIT, RIC or S-corporation for deferral.


The Final Regulations provide significant and welcome additional guidance on many aspects of the QOZ program. However, as noted above, there are areas where further clarification may still be necessary; for example, in better defining what constitutes non-qualified financial property, or providing more examples of when a triple-net lease might be considered as part of a trade or business.  With a few exceptions noted in the Preamble,[5] the Treasury Department has not indicated any intent to modify the Final Regulations or to release further regulations or other guidance in the QOZ area.  Accordingly, it remains to be seen whether and, if so, when any further clarifications will be forthcoming.

This bulletin is intended to provide a high-level summary of the Final Regulations, and none of the discussion herein should be treated as tax advice, for which taxpayers are urged to consult their own tax advisors.  However, for further information, regarding specific QOZ matters, please contact any of the Stroock lawyers listed below.


For More Information:

Jeffrey D. Uffner

Michelle M. Jewett

Brian J. Senie

Richard Madris

Kevin Matz

[1] References to the “Code” refer to the Internal Revenue Code of 1986, as amended.

[2] REG-115420-18.  Please refer to “Stroock’s Take on the New ‘Qualified Opportunity Zone’ Guidance,” Stroock Special Bulletin, October 19, 2018.

[3] Rev. Rul. 2018-29.

[4] REG-120186-18.  Please refer to “They’re Out! Stroock’s Take on the Second Set of QOZ Regulations,” Stroock Special Bulletin, April 19, 2019.

[5] One such item is a note in the Preamble that the Treasury Department and the IRS continue to consider the circumstances under which involuntary decertification of a QOF would be warranted, and intend to propose guidance regarding those circumstances.