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Investment Zones

New Qualified Opportunity Zone Developments


For this article you can also see the author’s introduction to QOZs, which includes useful research trails, such as IRS Q&As and related (“Navigating Qualified Opportunity Zones,”, June 24, 2020. State tax aspects are also important (See the author’s “Qualified Opportunity Zones and State Taxes,”, June 23, 2021).

Sep 20th 2021
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In this article, we will explore some of what you need to know now about Qualified Opportunity Zones(QOZs), which arose with the not-so-distant 2017 Tax Cuts and Jobs Act. 

First off, the goal of QOZs is to encourage investments in designated economic areas. The tax incentive encourages reinvestment of short-term and long-term capital gains in such areas.  

Such gains, if reinvested within 180 days, qualify for deferral and even some gain forgiveness. There have been some extensions of the 180-day rule in the COVID-19 environment (Notice 2020-39, Notice 2021-10).

One of the strategies focuses on picking long-term gains for deferral, when this frees up long-term capital losses to offset short-term capital gains (“Three Years of Opportunity Zones and Outlook for 2021,”, 11/20/20; If the investor was in the program early, it would be possible to forgive as much as 15 percent of the taxpayer’s capital gains.   

The test for 15 percent forgiveness is whether the investment will be held seven years looking to December 31, 2026.  As we write in 2021, it is possible for even new investments to qualify for 10 percent of gain forgiveness under the rule that asks if the investment has been held five years by December 31, 2026.

This key date is just barely more than five-years away as we write in the latter part of 2021. Accordingly, investments need to be made by year-end 2021 to qualify for gain forgiveness to any degree under the law as now written.

The capital gains eligible for deferral include stock market gains and realty capital gains. The idea is investments are going into defined business areas. The source of the capital gains can be varied.

The deferred gain, barring meeting the rules for gain forgiveness of 15 percent or 10 percent, rolls back into taxable income at December 31, 2026.  One of the general problems here is concentration of income in one year, 2026, barring interim sales that could minimize deferral and void the gain forgiveness aspects of the rules. For investments held 10 years, there is the prospect of no taxable gain.

So, there are basically three advantages to new 2021 investments:

  • initial gain deferral
  • some prospect of 10 percent of the old reinvested gain being forgiven if the new investment is held five years by the end of 2026
  • no gain on the investment per se assuming very long-term holding

Keep in mind that investing after 2021 won’t access the 10 percent gain forgiveness incentive that requires five years of ownership by the end of 2026. Not surprisingly, there is considerable discussion of liberalizing the law as currently written (three proposals are noted at “Legislation Would Extend OZ Incentive by Creating Subsequent Designation Rounds,” Opportunity Zone Resource Center,, 8/10/21).

Recent Developments

There have been IRS timing-relief concessions concerning various detailed rules: the 30-month substantial improvement period, the 90 percent investment standard, working capital safe harbor, and 12-month reinvestment period (Notice 2021-10).

The IRS confirmed the 2020 census changes do not affect the previously established boundaries of qualified opportunity zones, which were based on the 2010 census (Announcement 2021-10). The IRS issued some retroactive corrections to the final QOZ regulations, T.D. 9889, notably the working capital safe harbor rule. The corrections are effective August 5, 2021, and applicable on or after January 13, 2020 (FR Document 2021-16663 and 2021-16664, 86 FR 42715, 42716;

In January, 2021, IRS issued the latest Form 8996, “Qualified Opportunity Fund.” The IRS issued a correction concerning qualified opportunity zones in 2020’s instructions to Form 8949 Sales and Other Dispositions of Capital Assets (“Corrections to the 2020 Instructions for Form 8949,”

The IRS issued a timely-filing-relief ruling to an LLC self-certifying its status as a qualified opportunity fund (PLR 202116011, 4/23/21; see also PLR 202103013, 1/22/21). The U.S. Government Accountability Office called for more data and reports on the performance of opportunity zones (“Opportunity Zones:  Improved Oversight Needed to Evaluate Tax Expenditure Performance,” GAO-21-30,, 11/9/20).

Protecting the QOF Incentive – One Perspective

Are the rules changing?  In the many discussions of the Biden Administration’s “green book” of proposed legislation, we don’t hear the QOZ provisions being up for amendment. 

There are many provisions generally focused on increasing capital gains taxes, particularly for the wealthy, and the not-so-wealthy having a good year. There is some prospect of our traditional step-up at death rule being eliminated or mitigated, and even some prospect that death will trigger gain. Like-kind exchanges of investment realty may even become taxable.  

Larger capital gains taxes may bode well in so far as encouraging gains deferral via the QOF. Yet, there is the “bunching of income” problem. The QOZ deferral turns around at the end of 2026, which creates the prospect of a large capital gain in the one year (Sec. 1.1400Z-2(b)(1)(B)). The Biden proposal, among others, suggests an enhanced, large-gains tax which could be a disincentive for investing in QOZs.  

What are the prospects for the Biden proposals imposing a particularly large gains tax in 2026, and what impact could such tax have on QOZ investments?   

In the author’s view, when the topic is enhanced gains tax, there needs to be considered possible exceptions or special rules for large QOZ deferrals turning around in one year. Otherwise, the large gains tax proposals may serve as disincentives for QOZ investments.