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Navigating Qualified Opportunity Zones


Practitioners working with qualified opportunity funds or qualified opportunity zones (QOZ) need to be cognizant of the ongoing math and detailed accounting involved when working in this area.

Jun 24th 2020
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The relatively new statutes regarding qualified opportunity zones provide tax incentives to investments in areas that need economic stimulus. The concept arose in the 2017 Tax Cuts and Jobs Act, so the rules are to a significant degree still evolving.   

The basic advantage with such investments is that capital gains, whether short-term or long-term, can be deferred when the gains are reinvested in a qualified opportunity fund. There is an important date – December 31, 2026 – when the deferred gain is triggered back into income. 

There is also the possibility of some gain forgiveness – 10 percent gain forgiveness as to post-2019 investments held five years by the end of 2026. As to earlier investments, it is possible to have a 15 percent gain forgiveness assuming the investment has been held 7 years by the end of 2026.

Short-term capital gains can qualify, as can long-term capital gains. Short-term capital gains reinvested in a qualified opportunity zone don’t become long-term because the new investment is held long-term.

Depreciation-recapture relating to gains doesn’t qualify. It is basically realized gains that qualify for benefit. For example, Section 752(a) treats a partner’s share of liabilities as a contribution, but this doesn’t qualify as gains reinvested in the qualified opportunity fund for purposes of deferral. In general, capital gains need to be reinvested with 180 days.

Recent Relief

There is significant welcome relief in terms of delaying various aspects of the new provisions. This arises under the statutory authority of Section 7508A pertaining to emergency conditions (See generally IRS Notices 2020-23, 2020-39, and IR 2020-114).

Notably, Notice 2020-39 provides relief for certain failures to satisfy the 90 percent investment requirement and postpones certain other time period requirements. If the taxpayer’s 180-day reinvestment period would have fallen after March, 2020 and before December 31, 2020, the taxpayer has until December 31, 2020, to reinvest gain in a qualified opportunity fund.

The 180 day period had already been postponed through July 15, 2020 by another pronouncement. Also, the period between April 1, 2020 and December 31, 2020, is suspended in so far as the rule of the 30-month period for substantial improvements.

Our topic is complex, to say the least. There are 55 Q&A on the IRS site alone. The final regulations with commentary run over five hundred pages. 

The IRS considered over three hundred comment letters and other taxpayer feedback. The final regulations generally became effective March 13, 2020, well into the coronavirus pandemic.

In general, the rules look to substantial improvements during any 30-month period, not necessarily during the first 30 months of acquiring the property. Some of the latter IRS Q&A’s deal with this matter of substantial improvements:

  • Q&A 46 confirms that during the 30-month period after property is acquired, additions during this period must exceed an amount equal to the adjusted basis at the beginning of the 30-month period.
  • Q&A 47 generally grants relief during the 30-month period in that property in the process of being substantially improved can count as QOZ business property for purposes of the 90 percent test.  The 90 percent test generally focuses on the qualifying property at the fund and can encompass a 6-month period and year-end focus.
  • Q&A 48 deals with the basic requirement of having to substantially improve land contributed to a qualified opportunity fund, whereas there is no such requirement for donating a building to the QOF.
  • Q&A 49 discusses how “substantially all” works in both the 90 percent and 70 percent math tests.

The Rules

Following is a brief, but useful trail to the more important primary sources and IRS pronouncements on our topic:

  • Code; see IRC Sec. 1400Z-1 dealing with the definition of qualifying zones and Sec. 1400Z-2 providing elements of tax deferral and potentially even gain forgiveness. 
  • Legislative history; see Conf. Rep. to accompany H.R. 1, 115th Cong., 1st Sess. Rep. 115-466, December 15, 2017, p. 133-139 for text of the statute, and p. 537-540 for the legislative history.
  • Regulatory guidance; see regulations issued in final form in late 2019, after regulations were proposed in October, 2018, and April, 2019. See “links” at “IRS and Treasury finalize Opportunity Zone guidance,” IR 2019-212, December 19, 2019.  (
  • Opportunity Zones IRS Frequently Asked Questions (

The economic environment accompanying the coronavirus is one in which one might expect discussions of major expansions of the number of qualified zones. This author isn’t aware of significant expansions of qualified zones at this time.  

A qualified opportunity fund must generally hold at least 90 percent of its assets in QOZ property, and 70 percent of the tangible property owned or leased by a business must be QOZ property.


We don’t suggest that advising and reporting with respect to such funds is only for the specialist, but we do suggest that there are considerable complexities that the practitioner will need to study in regard to this relatively new topic. In general, the books and records need to be planned with a view to the sundry tax rules involved.

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