Firm Seeks Guidance on Mechanics of Qualified Opportunity Zone Funds

a. Taxpayers acknowledge that the deferral of the capital gains tax associated with the amount the taxpayer invested in their QOF will expire no later than 12/31/2026. Taxpayers acknowledge they will need to pay the appropriate amount of capital gains tax then. But if the taxpayer still owns their position in the QOF as the date of inclusion, and the taxpayer has not yet held their position for five (5) or seven (7) years at that point in time, there needs to be a way for the taxpayer to enjoy those benefits as outlined in 1400Z-2 subsections (b)(2)(B)(iii & iv) by way of a taxpayer adjustment of their Federal Tax Returns after the taxpayer sells their position in their QOF.

a. Please clarify that the process described in Revised Rule 2018-29 where “land” is segregated from the “building” in the calculation of the adjusted basis is exclusively for the determination if a substantial improvement has exceeded the adjusted basis and for no other purpose.

a. Of the three types of Zone Property, per 1400Z-2 subsections (d)(2)(B & C), both Zone Stock and Zone Partnership Interest are explicitly required to be purchased in exchange for cash from an unrelated person, but per 1400Z-2 subsection (d)(2)(D), Zone Business Property it is not clear if it is required to be purchased in exchange for cash from an unrelated person. Are there other means in which the Zone Business Property may be acquired?

a. Per 1400Z-2 subsection (d)(2)(D)(i)(I), Zone Business Property is “acquired”. Does this mean that in regards to a qualified opportunity zone business, its tangible property may be leased provided the lease was acquired after December 31, 2017?

a. In the 3^rd paragraph of the 3^rd page of Revised Rule 2018-29, the paragraph questioned if land can constitute Zone Business Property. Revised Rule 2018-29 did not answer this critical question which would pose significant negative consequences to taxpayers if land was not considered Zone Business Property. This is because taxpayers are anticipating the appreciation of the land value to be an important component of tax benefits in their overall investment return.

b. Please clarify that “land” being segregated from the “building” in the calculation of the adjusted basis is exclusively for the determination if a substantial improvement has exceeded the adjusted basis and the segregation is for no other purpose.

a. This requirement on a Zone Business is listed in 1400Z-2 subsection (d)(3)(A)(ii) which connects to paragraph 4 of section 1397C(b), and is also listed in the 2^nd paragraph of the 2^nd column of Federal Register page 54295. 

a. In the proposed regulations in Federal Register page 54284 Section F, the 31 month safe harbor for working capital is only granted to a Zone Business.

a. Will this certification need to occur on an annual basis?

a. Is there a minimum hold time the QOF will need to hold a particular QOZ property?

a. How are reserves treated in regards to the 90% rule when the QOF still exists as an entity, but has sold the QOZ property and is in “wind-down” mode? How can the 90% rule be satisfied in the situation where the QOF is required to hold reserves for a two-year time period for potential liabilities with the new buyer of the QOZ property, but these reserves are associated with only one of multiple deals managed by the QOF (in a period prior to wind-down mode)?