Within the 169 pages of guidance, the New Regs clarify several terms, such as what constitutes “Substantially all”, the use of qualified opportunity zone business property in a qualified opportunity zone, the “Reasonable period” for a QOF to reinvest proceeds from the sale of qualifying assets, and what transactions comprise an inclusion event that would lead to the recognition of deferred gain in gross income. Land is treated as qualified opportunity zone business property if it is used in a trade or business of a QOF or QOZB.
However, the New Regs clarify that holding of land for investment itself does not give rise to a trade or business and such land could not be qualified opportunity zone business property. The proposed regulations provide that a trade or business may satisfy the 50% gross income requirement if the tangible property of the business that is in a qualified opportunity zone and the management or operational functions performed for the business in the qualified opportunity zone are each necessary to generate 50% of the gross income of the trade or business.
The New Regs address this concern by looking to the Empowerzone statutes for guidance which provide that if the amount of real property based on square footage located within the qualified opportunity zone is substantial as compared to the amount of real property based on square footage outside of the zone, and the real property outside of the zone is contiguous to part or all of the real property located inside the zone, then all of the property would be deemed to be located within a qualified zone. The New Regs use this approach by stating that real property located within the qualified opportunity zone should be considered substantial if the unadjusted cost of the real property inside a qualified opportunity zone is greater than the unadjusted cost of real property outside of the qualified opportunity zone.
The New Regs define the length for a reasonable period of time to reinvest the return of capital from investments in qualified opportunity zone stock and qualified opportunity zone partnership interests, and to reinvest proceeds received from the sale or disposition of qualified opportunity zone property. The New Regs provide that a QOF has 12 months from the time of the sale or disposition of qualified opportunity zone property or the return of capital from investments in qualified opportunity zone stock or qualified opportunity zone partnership interests to reinvest the proceeds in other qualified opportunity zone property before the proceeds would not be considered qualified opportunity zone property with regards to the 90% asset test.