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- **Collection:** Agency decision
- **Document type:** Agency decision

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This document has been submitted to the Office of the Federal Register (OFR) for
publication and is currently pending placement on public display at the OFR and
publication in the Federal Register. The version of the proposed rule released
today may vary slightly from the published document if minor editorial changes
are made during the OFR review process. The document published in the Federal
Register will be the official document.

[4830-01-p]
DEPARTMENT OF TREASURY
Internal Revenue Service
26 CFR Part I
[REG-115420-18]
RIN 1545-BP03
Investing in Qualified Opportunity Funds
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
SUMMARY: This document contains proposed regulations that provide guidance under
new section 1400Z-2 of the Internal Revenue Code (Code) relating to gains that may be
deferred as a result of a taxpayer’s investment in a qualified opportunity fund (QOF).
Specifically, the proposed regulations address the type of gains that may be deferred by
investors, the time by which corresponding amounts must be invested in QOFs, and the
manner in which investors may elect to defer specified gains. This document also
contains proposed regulations applicable to QOFs, including rules for self-certification,
valuation of QOF assets, and guidance on qualified opportunity zone businesses. The

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proposed regulations affect QOFs and their investors. This document also provides
notice of a public hearing on these proposed regulations.
DATES: Written (including electronic) comments must be received by [INSERT DATE
60 DAYS AFTER DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL
REGISTER]. Outlines of topics to be discussed at the public hearing scheduled for
January 10, 2019 at 10 a.m. must be received by [INSERT DATE 60 DAYS AFTER
DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER].
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-115420-18), room 5203,
Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.
Submissions may be hand delivered Monday through Friday between the hours of
8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-115420-18), Courier’s Desk, Internal
Revenue Service, 1111 Constitution Avenue, NW., Washington, DC 20224.
Alternatively, taxpayers may submit comments electronically via the Federal
Rulemaking Portal at www.regulations.gov (IRS REG-115420-18). The public hearing
will be held in the IRS auditorium, Internal Revenue Building, 1111 Constitution Avenue,
NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Erika C. Reigle of the Office of Associate Chief Counsel (Income Tax and Accounting),
(202) 317-7006 and Kyle C. Griffin of the Office of Associate Chief Counsel (Income
Tax and Accounting), (202) 317-4718; concerning the submission of comments, the
hearing, or to be placed on the building access list to attend the hearing, Regina L.
Johnson, (202) 317- 6901 (not toll-free numbers).

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SUPPLEMENTARY INFORMATION:
Background
This document contains proposed regulations under section 1400Z-2 of the Code
that amend the Income Tax Regulations (26 CFR Part 1). Section 13823 of the Tax
Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054, 2184 (2017) (TCJA), amended
the Code to add sections 1400Z-1 and 1400Z-2. Section 1400Z-1 provides procedural
rules for designating qualified opportunity zones and related definitions. Section 1400Z2 allows a taxpayer to elect to defer certain gains to the extent that corresponding
amounts are timely invested in a QOF.
Section 1400Z-2, in conjunction with section 1400Z-1, seeks to encourage
economic growth and investment in designated distressed communities (qualified
opportunity zones) by providing Federal income tax benefits to taxpayers who invest in
businesses located within these zones. Section 1400Z-2 provides two main tax
incentives to encourage investment in qualified opportunity zones. First, it allows for the
deferral of inclusion in gross income for certain gains to the extent that corresponding
amounts are reinvested in a QOF. Second, it excludes from gross income the postacquisition gains on investments in QOFs that are held for at least 10 years.
As is more fully explained in the Explanation of Provisions, these proposed
regulations describe and clarify the requirements that must be met by a taxpayer in
order properly to defer the recognition of gains by investing in a QOF. In addition, the
proposed regulations provide rules permitting a corporation or partnership to self-certify
as a QOF. Finally, the proposed regulations provide initial proposed rules regarding

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some of the requirements that must be met by a corporation or partnership in order to
qualify as a QOF.
Contemporaneous with the issuance of these proposed regulations, the IRS is
releasing a revenue ruling addressing the application to real property of the “original
use” requirement in section 1400Z-2(d)(2)(D)(i)(II) and the “substantial improvement”
requirement in section 1400Z-2(d)(2)(D)(i)(II) and 1400Z-2(d)(2)(D)(ii).
In addition, these proposed regulations address the substantial-improvement
requirement with respect to a purchased building located in a qualified opportunity zone.
They provide that for purposes of this requirement, the basis attributable to land on
which such a building sits is not taken into account in determining whether the building
has been substantially improved. Excluding the basis of land from the amount that
needs to be doubled under section 1400Z-2(d)(2)(D)(ii) for a building to be substantially
improved facilitates repurposing vacant buildings in qualified opportunity zones.
Similarly, an absence of a requirement to increase the basis of land itself would address
many of the comments that taxpayers have made regarding the need to facilitate
repurposing vacant or otherwise unutilized land.
In connection with soliciting comments on these proposed regulations the
Department of the Treasury (Treasury Department) and the IRS are soliciting comments
on all aspects of the definition of “original use” and “substantial improvement.” In
particular, they are seeking comments on possible approaches to defining the “original
use” requirement, for both real property and other tangible property. For example, what
metrics would be appropriate for determining whether tangible property has “original
use” in an opportunity zone? Should the use of tangible property be determined based

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on its physical presence within an opportunity zone, or based on some other measure?
What if the tested tangible property is a vehicle or other movable tangible property that
was previously used within the opportunity zone but acquired from a person outside the
opportunity zone? Should some period of abandonment or under-utilization of tangible
property erase the property’s history of prior use in the opportunity zone? If so, should
such a fallow period enable subsequent productive utilization of the tangible property to
qualify as “original use”? Should the rules appropriate for abandonment and
underutilization of personal tangible property also apply to vacant real property that is
productively utilized after some period? If so, what period of abandonment,
underutilization, or vacancy would be consistent with the statute? In addition,
comments are requested on whether any additional rules regarding the “substantial
improvement” requirement for tangible property are warranted or would be useful.
The Treasury Department and the IRS are working on additional published
guidance, including additional proposed regulations expected to be published in the
near future. The Treasury Department and the IRS expect the forthcoming proposed
regulations to incorporate the guidance contained in the revenue ruling to facilitate
additional public comment. The forthcoming proposed regulations are expected to
address other issues under section 1400Z-2 that are not addressed in these proposed
regulations. Issues expected to be addressed include: the meaning of “substantially all”
in each of the various places where it appears in section 1400Z-2; the transactions that
may trigger the inclusion of gain that has been deferred under a section 1400Z-2(a)
election; the “reasonable period” (see section 1400Z-2(e)(4)(B)) for a QOF to reinvest
proceeds from the sale of qualifying assets without paying a penalty; administrative

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rules applicable under section 1400Z-2(f) when a QOF fails to maintain the required
90 percent investment standard; and information-reporting requirements under
section 1400Z-2.
The Treasury Department and the IRS welcome comments on what other
additional issues should be addressed in forthcoming proposed regulations or guidance.
Explanation of Provisions
I. Deferring Tax on Capital Gains by Investing in Opportunity Zones
A. Gains Eligible for Deferral
The proposed regulations clarify that only capital gains are eligible for deferral
under section 1400Z-2(a)(1). In setting forth the gains that are subject to deferral, the
text of section 1400Z-2(a)(1) specifies “gain from the sale to, or exchange with, an
unrelated person of any property held by the taxpayer,” to the extent that such gain
does not exceed the aggregate amount invested by the taxpayer in a QOF during the
180-day period beginning on the date of the sale or exchange (emphasis added). The
statutory text is silent as to whether Congress intended both ordinary and capital gains
to be eligible for deferral under section 1400Z-2. (Sections 1221 and 1222 define these
two kinds of gains.) However, the statute’s legislative history explicitly identifies “capital
gains” as the gains that are eligible for deferral. The Treasury Department and the IRS
believe, based on the legislative history as well as the text and structure of the statute,
that section 1400Z-2 is best interpreted as making deferral available only for capital
gains. The proposed regulations provide that a gain is eligible for deferral if it is treated
as a capital gain for Federal income tax purposes. Eligible gains, therefore, generally

7
include capital gain from an actual, or deemed, sale or exchange, or any other gain that
is required to be included in a taxpayer’s computation of capital gain.
The proposed regulations address two additional gain deferral requirements.
First, the gain to be deferred must be gain that would be recognized, if deferral under
section 1400Z-2(a)(1) were not permitted, not later than December 31, 2026, the final
date under section 1400Z-2(a)(2)(B) for the deferral of gain. Second, the gain must not
arise from a sale or exchange with a related person as defined in section 1400Z-2(e)(2).
Section 1400Z-2(e)(2) incorporates the related person definition in sections 267(b) and
707(b)(1) but substitutes “20 percent” in place of “50 percent” each place it occurs in
section 267(b) or section 707(b)(1).
B. Types of Taxpayers Eligible to Elect Gain Deferral
The proposed regulations clarify that taxpayers eligible to elect deferral under
section 1400Z-2 are those that recognize capital gain for Federal income tax purposes.
These taxpayers include individuals, C corporations (including regulated investment
companies (RICs) and real estate investment trusts (REITs)), partnerships, and certain
other pass-through entities, including common trust funds described in section 584, as
well as, qualified settlement funds, disputed ownership funds, and other entities taxable
under §1.468B of the Income Tax Regulations.
In order to address the numerous issues raised by new section 1400Z-2 for passthrough entities, the proposed regulations include special rules for partnerships and
other pass-through entities, and for taxpayers to whom these entities pass through
income and other tax items. Under these rules, the entities and taxpayers can invest in
a QOF and thus defer recognition of eligible gain. The Treasury Department and the

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IRS request comments on whether the rules are sufficient and whether more detailed
rules are required to provide additional certainty for investors in pass-through entities
that are not partnerships.
C. Investments in a QOF
The proposed regulations clarify that, to qualify under section 1400Z-2(a)(1)(A),
(that is, to be an eligible interest in a QOF), an investment in the QOF must be an equity
interest in the QOF, including preferred stock or a partnership interest with special
allocations. Thus, an eligible interest cannot be a debt instrument within the meaning of
section 1275(a)(1) and §1.1275-1(d). Provided that the eligible taxpayer is the owner of
the equity interest for Federal income tax purposes, status as an eligible interest is not
impaired by the taxpayer’s use of the interest as collateral for a loan, whether a
purchase-money borrowing or otherwise. The proposed regulations also clarify that
deemed contributions of money under section 752(a) do not result in the creation of an
investment in a QOF.
D. 180-Day Rule for Deferring Gain by Investing in a QOF
Under section 1400Z-2(a)(1)(A), to be able to elect to defer gain, a taxpayer must
generally invest in a QOF during the 180-day period beginning on the date of the sale or
exchange giving rise to the gain. Some capital gains, however, are the result of Federal
tax rules deeming an amount to be a gain from the sale or exchange of a capital asset,
and, in many cases, the statutory language providing capital gain treatment does not
provide a specific date for the deemed sale. The proposed regulations address this
issue by providing that, except as specifically provided in the proposed regulations, the
first day of the 180-day period is the date on which the gain would be recognized for

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Federal income tax purposes, without regard to the deferral available under section
1400Z-2. The proposed regulations include examples that illustrate the general rule by
applying it to capital gains in a variety of situations (including, for example, gains from
the sale of exchange-traded stock and capital gain dividend distributions).
If a taxpayer acquires an original interest in a QOF in connection with a gaindeferral election under section 1400Z-2(a)(1)(A), if a later sale or exchange of that
interest triggers an inclusion of the deferred gain, and if the taxpayer makes a qualifying
new investment in a QOF, then the proposed regulations provide that the taxpayer is
eligible to make a section 1400Z-2(a)(2) election to defer the inclusion of the previously
deferred gain. Deferring an inclusion otherwise mandated by section 1400Z-2(a)(1)(B)
in this situation is permitted only if the taxpayer has disposed of the entire initial
investment without which the taxpayer could not have made the previous deferral
election under section 1400Z-2. The complete disposition is necessary because section
1400Z-2(a)(2)(A) expressly prohibits the making of a deferral election under section
1400Z-2(a)(1) with respect to a sale or exchange if an election previously made with
respect to the same sale or exchange remains in effect. The general 180-day rule
described above determines when this second investment must be made to support the
second deferral election. Under that rule, the first day of the 180-day period for the new
investment in a QOF is the date that section 1400Z-2(b)(1) provides for inclusion of the
previously deferred gain .
Comments are requested as to whether the final regulations should contain
exceptions to the general 180-day rule and whether it would be helpful for either the

10
final regulations or other guidance to illustrate the application of the general 180-day
rule to additional circumstances, and what those circumstances are.
E. Attributes of Included Income When Gain Deferral Ends
Section 1400Z-2(a)(1)(B) and (b) require taxpayers to include in income
previously deferred gains. The proposed regulations provide that all of the deferred
gain’s tax attributes are preserved through the deferral period and are taken into
account when the gain is included. The preserved tax attributes include those taken
into account under sections 1(h), 1222, 1256, and any other applicable provisions of the
Code. Furthermore, the proposed regulations address situations in which separate
investments providing indistinguishable property rights (such as serial purchases of
common stock in a corporation that is a QOF) are made at different times or are made
at the same time with separate gains possessing different attributes (such as different
holding periods). If a taxpayer disposes of less than all of its fungible interests in a
QOF, the proposed regulations provide that the QOF interests disposed of must be
identified using a first-in, first-out (FIFO) method. Where the FIFO method does not
provide a complete answer, such as where gains with different attributes are invested in
indistinguishable interests at the same time, the proposed regulations provide that a
pro-rata method must be used to determine the character, and any other attributes, of
the gain recognized. Examples in the proposed regulations illustrate this rule.
Comments are requested as to whether different methods should be used. Any
such alternative methods must both provide certainty as to which fungible interest a
taxpayer disposes of and allow taxpayers to comply easily with the requirements of

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section 1400Z-2(a)(1)(B) and (b),which require that certain dispositions of an interest in
a QOF cause deferred gain be included in a taxpayer’s income.
II. Special rules
A. Gain not already subject to an election.
Under section 1400Z-2(a)(2)(A), no election may be made under section 1400Z2(a)(1) with respect to a sale or exchange if an election previously made with respect to
that sale or exchange is in effect. There has been some confusion as to whether this
language bars a taxpayer from making multiple elections within 180-days for various
parts of the gain from a single sale or exchange of property held by the taxpayer. This
rule in section 1400Z-2(a)(2)(A) is meant to exclude from the section 1400Z-2(a)(1)
election multiple purported elections with respect to the same gain. (Although the gain
itself can be deferred only once, a taxpayer might be seeking to multiply the
investments eligible for various increases in basis.) Thus, the proposed regulations
clarify that in the case of a taxpayer who has made an election under section 1400Z2(a) with respect to some but not all of an eligible gain, the term “eligible gain” includes
the portion of that eligible gain as to which no election has been made. (All elections
with respect to portions of the same gain would, of course, be subject to the same 180day period.)
B. Section 1256 contracts
The proposed regulations provide rules for capital gains arising from
section 1256 contracts. Under section 1256, a taxpayer generally “marks to market”
each section 1256 contract at the termination or transfer of the taxpayer’s position in the
contract or on the last business day of the taxable year if the contract is still held by the

12
taxpayer at that time. The mark causes the taxpayer to take into account in the taxable
year any not-yet recognized appreciation or depreciation in the position. This gain or
loss, if capital, is treated as 60 percent long-term capital gain or loss and 40 percent
short-term capital gain or loss. Currently, for federal income tax purposes, the only
relevant information required to be reported by a broker to the IRS and to individuals
and certain other taxpayers holding section 1256 contracts, is the taxpayer’s net
recognized gain or loss from all of the taxpayer’s section 1256 contracts held during the
taxable year. Some taxpayers holding section 1256 contracts, however, report the gain
or loss from section 1256 contracts to the IRS on a per contract basis rather than on an
aggregate basis. To minimize the burdens on taxpayers, brokers, and the IRS from tax
compliance and tax administration, the proposed regulations allow deferral under
section 1400Z-2(a)(1) only for a taxpayer’s capital gain net income from section 1256
contracts for a taxable year. In addition, because the capital gain net income from
section 1256 contracts for a taxable year is determinable only as of the last day of the
taxable year, the proposed regulations provide that the 180-day period for investing
capital gain net income from section 1256 contracts in a QOF begins on the last day of
the taxable year.
Finally, the proposed regulations do not allow any deferral of gain from a section
1256 contract in a taxable year if, at any time during the taxable year, one of the
taxpayer’s section 1256 contracts was part of an offsetting-positions transaction (as
defined later in the proposed regulations and described later in this preamble) in which
any of the other positions was not also a section 1256 contract.

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Comments are requested on this limitation and on whether capital gain from a
section 1256 contract should be eligible for deferral under section 1400Z-2 on a per
contract basis rather than on an aggregate net basis. Reporting on a per contract basis
might require a significant increase in the number of information returns that taxpayers
would need to file with the IRS as compared to the number of information returns that
are currently filed on an aggregate net basis. Comments are requested on how to
minimize the burdens and complexity that may be associated with reporting on a per
contract basis for section 1256 contracts.
C. Offsetting-positions transactions, including straddles
The Treasury Department and the IRS considered allowing deferral under
section 1400Z-2(a)(1) for a net amount of capital gain related to a straddle (as defined
in section 1092(c)(1)) after the disposition of all positions in the straddle. However,
such a rule would pose significant administrative challenges. For example, additional
rules would be needed for a taxpayer to defer such a net amount of capital gain when
positions are disposed of in different taxable years (and likely would require affected
taxpayers to file amended tax returns). Further, additional rules might be needed to
take into account the netting requirements for identified mixed straddles described in
§1.1092(b)-3T or 1.1092(b)-6 and for mixed straddle accounts described in §1.1092(b)4T. Accordingly, in the interest of sound tax administration and to provide consistent
treatment for transactions involving offsetting positions in personal property, the
proposed regulations provide that any capital gain from a position that is or has been
part of an offsetting-positions transaction (other than an offsetting-positions transaction

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in which all of the positions are section 1256 contracts) is not eligible for deferral under
section 1400Z-2.
An offsetting-positions transaction is defined in the proposed regulations as a
transaction in which a taxpayer has substantially diminished the taxpayer's risk of loss
from holding one position with respect to personal property by holding one or more
other positions with respect to personal property (whether or not of the same kind). It
does not matter whether either of the positions is with respect to actively traded
personal property. An offsetting-positions transaction includes a straddle as defined in
section 1092 and the regulations thereunder, including section 1092(d)(4), which
provides rules for positions held by related persons and certain flow-through entities (for
example, a partnership). An offsetting-positions transaction also includes a transaction
that would be a straddle (taking into account the principles referred to in the preceding
sentence) if the straddle definition did not contain the active trading requirement in
section 1092(d)(1).
III. Gains of Partnerships and Other Pass-Through Entities
Commenters have requested clarification regarding whether deferral is possible
under section 1400Z-2 any time a partnership would otherwise recognize capital gain.
The proposed regulations provide rules that permit a partnership to elect deferral under
section 1400Z-2 and, to the extent that the partnership does not elect deferral, provide
rules that allow a partner to do so. These rules both clarify the circumstances under
which each can elect and clarify when the applicable 180-day period begins.
Proposed §1.1400Z-2(a)-1(c)(1) provides that a partnership may elect to defer all
or part of a capital gain to the extent that it makes an eligible investment in a QOF.

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Because the election provides for deferral, if the election is made, no part of the
deferred gain is required to be included in the distributive shares of the partners under
section 702, and the gain is not subject to section 705(a)(1). Proposed §1.1400Z-2(a)1(c)(2) provides that, to the extent that a partnership does not elect to defer capital gain,
the capital gain is included in the distributive shares of the partners under section 702
and is subject to section 705(a)(1). If all or any portion of a partner’s distributive share
satisfies all of the rules for eligibility under section 1400Z-2(a)(1) (including not arising
from a sale or exchange with a person that is related either to the partnership or to the
partner), then the partner generally may elect its own deferral with respect to the
partner’s distributive share. The partner’s deferral is potentially available to the extent
that the partner makes an eligible investment in a QOF.
Consistent with the general rule for the beginning of the 180-day period, the
partner’s 180-day period generally begins on the last day of the partnership’s taxable
year, because that is the day on which the partner would be required to recognize the
gain if the gain is not deferred. The proposed regulations, however, provide an
alternative for situations in which the partner knows (or receives information) regarding
both the date of the partnership’s gain and the partnership’s decision not to elect
deferral under section 1400Z-2. In that case, the partner may choose to begin its own
180-day period on the same date as the start of the partnership’s 180-day period.
The proposed regulations state that rules analogous to the rules provided for
partnerships and partners apply to other pass-through entities (including S corporations,
decedents’ estates, and trusts) and to their shareholders and beneficiaries. Comments

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are requested regarding whether taxpayers need additional details regarding analogous
treatment for pass-through entities that are not partnerships.
IV. How to Elect Deferral
These proposed regulations require deferral elections to be made at the time and
in the manner provided by the Commissioner of Internal Revenue (Commissioner). The
Commissioner may prescribe in regulations, revenue procedures, notices, or other
guidance published in the Internal Revenue Bulletin or in forms and instructions the
time, form, and manner in which an eligible taxpayer may elect to defer eligible gains
under section 1400Z-2(a). It is currently anticipated that taxpayers will make deferral
elections on Form 8949, which will be attached to their Federal income tax returns for
the taxable year in which the gain would have been recognized if it had not been
deferred. Form instructions to this effect are expected to be released very shortly after
these proposed regulations are published. Comments are requested whether additional
proposed regulations or other guidance are needed to clarify the required procedures.
In addition IRS releases draft forms for public review and comments. These drafts are
posted to www.IRS.gov/DraftForms and include a cover sheet that indicates how to
submit comments.
V. Section 1400Z-2(c) Election for Investments Held At Least 10 Years
A. In General
Under section 1400Z-2(c), a taxpayer that holds a QOF investment for at least
ten years may elect to increase the basis of the investment to the fair market value of
the investment on the date that the investment is sold or exchanged.

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The basis step-up election under section 1400Z-2(c) is available only for gains
realized upon investments that were made in connection with a proper deferral election
under section 1400Z-2(a). It is possible for a taxpayer to invest in a QOF in part with
gains for which a deferral election under section 1400Z-2(a) is made and in part with
other funds (for which no section 1400Z-2(a) deferral election is made or for which no
such election is available). Section 1400Z-2(e) requires that these two types of QOF
investments be treated as separate investments, which receive different treatment for
Federal income tax purposes. Pursuant to section 1400Z-2(e)(1)(B), the proposed
regulations reiterate that a taxpayer may make the election to step-up basis in an
investment in a QOF that was held for 10 years or more only if a proper deferral election
under section 1400Z-2(a) was made for the investment.
B. QOF Investments and the 10-Year Zone Designation Period
Section 1400Z-2(c), as stated above, permits a taxpayer to elect to increase the
basis in its investment in a QOF if the investment is held for at least ten years from the
date of the original investment in the QOF. However, under section 1400Z-1(f), the
designations of all qualified opportunity zones now in existence will expire on
December 31, 2028. The loss of qualified opportunity zone designation raises
numerous issues regarding gain deferral elections that are still in effect when the
designation expires. Among the issues that the zone expiration date raises is whether,
after the relevant qualified opportunity zone loses its designation, investors may still
make basis step-up elections for QOF investments from 2019 and later.
Section 1400Z-2 does not contain specific statutory language like that in some
other provisions, such as the D.C. enterprise zones provision in section 1400B(b)(5),

18
that expressly permits a taxpayer to satisfy the requisite holding period after the
termination of the designation of a zone. Commenters have raised the question
described in the preceding paragraph—whether a taxpayer whose investment in a QOF
has its 10-year anniversary after the 2028 calendar year will be able to take advantage
of the basis step-up election provided in section 1400Z-2(c). The incentive provided by
this benefit is integral to the primary purpose of the provision (see H.R. Rept. 115-466,
537, which describes the intent to attract an influx of capital to designated low income
communities). For this reason, the proposed regulations permit taxpayers to make the
basis step-up election under section 1400Z-2(c) after a qualified opportunity zone
designation expires.
The ability to make this election is preserved under these proposed regulations
until December 31, 2047, 20½ years after the latest date that an eligible taxpayer may
properly make an investment that is part of an election to defer gain under section
1400Z-2(a). Because the latest gain subject to deferral would be at the end of 2026, the
last day of the 180-day period for that gain would be in late June 2027. A taxpayer
deferring such a gain would achieve a 10-year holding period in a QOF investment only
in late June 2037. Thus, this proposed rule would permit an investor in a QOF that
makes an investment as late as the end of June 2027 to hold the investment in the QOF
for the entire 10-year holding period described in section 1400Z-2(c), plus another 10
years.
The additional ten year period is provided to avoid situations in which, in order to
enjoy the benefits provided by section 1400Z-2(c), a taxpayer would need to dispose of
an investment in a QOF shortly after completion of the required 10-year holding period.

19
There may be cases in which disposal shortly after the 10-year holding period would
diverge from otherwise desirable business conduct, and, absent the additional time,
some taxpayers may lose the statutory benefit.
The Treasury Department and the IRS request comments on this proposed fixed
20½-year end date for the section 1400Z-2(c) basis step-up election. In particular,
whether some other time period would better align with taxpayers’ economic interests
and the purposes of the statute. Comments may also include an alternative to
incentivizing investors to disinvest shortly before any such a fixed end date for the
section 1400Z-2(c) basis step-up election. For example, should the regulations provide
for a presumed basis step-up election immediately before the ability to elect a step-up
upon disposition expires? If such a basis step-up without disposition is allowed, how
should a QOF investment be properly valued at the time of the step-up?
VI. Rules for a Qualified Opportunity Fund
A. Certification of an Entity as a QOF
Section 1400Z-2(e)(4) allows the Secretary of the Treasury to prescribe
regulations for the certification of QOFs for purposes of section 1400Z-2. In order to
facilitate the certification process and minimize the information collection burden placed
on taxpayers, the proposed regulations generally permit any taxpayer that is a
corporation or partnership for tax purposes to self-certify as a QOF, provided that the
entity self-certifying is statutorily eligible to do so. The proposed regulations permit the
Commissioner to determine the time, form, and manner of the self-certification in IRS
forms and instructions or in guidance published in the Internal Revenue Bulletin. It is
expected that taxpayers will use Form 8996, Qualified Opportunity Fund, both for initial

20
self-certification and for annual reporting of compliance with the 90-Percent Asset Test
in section 1400Z-2(d)(1). It is expected that the Form 8996 would be attached to the
taxpayer’s Federal income tax return for the relevant tax years. The IRS expects to
release this form contemporaneous with the release of these proposed regulations.
B. Designating When a QOF Begins
The proposed regulations allow a QOF both to identify the taxable year in which
the entity becomes a QOF and to choose the first month in that year to be treated as a
QOF. If an eligible entity fails to specify the first month it is a QOF, then the first month
of its initial taxable year as a QOF is treated as the first month that the eligible entity is a
QOF. A deferral election under section 1400Z-2(a) may only be made for investments
in a QOF. Therefore, a proper deferral election under section 1400Z-2(a) may not be
made for an otherwise qualifying investment that is made before an eligible entity is a
QOF.
C. Becoming a QOF in a Month Other Than the First Month of the Taxable Year
The proposed regulations provide guidance regarding application of the 90Percent Asset Test in section 1400Z-2(d)(1) with respect to an entity’s first year as a
QOF, if the entity chooses to become a QOF beginning with a month other than the first
month of its first taxable year. The phrase “first 6-month period of the taxable year of
the fund” means the first 6-month period composed entirely of months which are within
the taxable year and during which the entity is a QOF. For example, if a calendar-year
entity that was created in February chooses April as its first month as a QOF, then the
90-Percent-Asset-Test testing dates for the QOF are the end of September and the end
of December. Moreover, if the calendar-year QOF chooses a month after June as its

21
first month as a QOF, then the only testing date for the taxable year is the last day of
the QOF’s taxable year. Regardless of when an entity becomes a QOF, the last day of
the taxable year is a testing date.
The proposed regulations clarify that the penalty in section 1400Z-2(f)(1) does
not apply before the first month in which the entity qualifies as a QOF. The Treasury
Department and the IRS intend to publish additional proposed regulations that will
address, among other issues, the applicability of the section 1400Z-2(f)(1) penalty and
conduct that may lead to potential decertification of a QOF.
Section 1400Z-2(e)(4)(B) authorizes regulations to ensure that a QOF has “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
business property.” For example, if a QOF shortly before a testing date sells qualified
opportunity zone property, that QOF should have a reasonable amount of time in which
to bring itself into compliance with the 90-Percent Asset Test. Soon-to-be-released
proposed regulations will provide guidance on these reinvestments by QOFs. Many
stakeholders have requested guidance not only on the length of a “reasonable period of
time to reinvest” but also on the Federal income tax treatment of any gains that the QOF
reinvests during such a period. In the forthcoming notice of proposed rulemaking, the
Treasury Department and the IRS will invite additional public comment on the scope of
statutorily permissible policy alternatives. The Treasury Department and the IRS will
carefully consider those comments in evaluating the widest range of statutorily
permissible possibilities.

22
D. Pre-Existing Entities
Commenters have inquired whether a pre-existing entity may qualify as a QOF or
as the issuer of qualified opportunity zone stock or of a qualified opportunity zone
partnership. For example, commenters have asked whether a pre-existing entity may
self-certify as a QOF or whether, after 2017, a QOF may acquire an equity interest in a
pre-existing operating partnership or corporation. The proposed regulations clarify that
there is no prohibition to using a pre-existing entity as a QOF or as a subsidiary entity
operating a qualified opportunity business, provided that the pre-existing entity satisfies
the requirements under section 1400Z-2(d).
As previously discussed, section 1400Z-2(d)(1) requires that a QOF must
undergo semi-annual tests to determine whether its assets consist on average of at
least 90 percent qualified opportunity zone property. For purposes of these semiannual tests, section 1400Z-2(d)(2) requires that a tangible asset can be qualified
opportunity zone business property by an entity that has self-certified as a QOF or an
operating subsidiary entity only if it acquired the asset after 2017 by purchase. The
Treasury Department and the IRS request comments on whether there is a statutory
basis for additional flexibilities that might facilitate qualification of a greater number of
pre-existing entities across broad categories of industries.
E. Valuation Method for Applying the 90-Percent Asset Test
For purposes of the calculation of the 90-Percent Asset Test in section 1400Z2(d)(1) by the QOF, the proposed regulations require the QOF to use the asset values
that are reported on the QOF’s applicable financial statement for the taxable year, as
defined in §1.475(a)-4(h) of the Income Tax Regulations. If a QOF does not have an

23
applicable financial statement, the proposed regulations require the QOF to use the cost
of its assets. The Treasury Department and the IRS request comments on the
suitability of both of these valuation methods, and whether another method, such as tax
adjusted basis, would be better for purposes of assurance and administration.
F. Nonqualified Financial Property
Commenters have recommended that the Treasury Department and the IRS
adopt a rule that provides that cash be an appropriate QOF property for purposes of the
90-Percent Asset Test, if the cash is held with the intent of investing in qualified
opportunity zone property. Specifically, commenters indicated that, because developing
a new business or the construction or rehabilitation of real estate may take longer than
six months, QOFs should be given longer than the six months provided under section
1400Z-2(d)(1) to invest in qualifying assets.
In response to these comments, the proposed regulations provide a working
capital safe harbor for QOF investments in qualified opportunity zone businesses that
acquire, construct, or rehabilitate tangible business property, which includes both real
property and other tangible property used in a business operating in an opportunity
zone. The safe harbor allows qualified opportunity zone businesses to apply the
definition of working capital provided in section 1397C(e)(1) to property held by the
business for a period of up to 31 months, if there is a written plan that identifies the
financial property as property held for the acquisition, construction, or substantial
improvement of tangible property in the opportunity zone, there is written schedule
consistent with the ordinary business operations of the business that the property will be

24
used within 31-months, and the business substantially complies with the schedule.
Taxpayers would be required to retain any written plan in their records.
This expansion of the term “working capital” reflects the fact that section 1400Z2(d)(iii) anticipates situations in which a QOF or operating subsidiary may need up to 30
months after acquiring a tangible asset in which to improve the asset substantially. In
seeking relief, some commenters based their requests on administrative practices that
have developed under other sections of the Code that these commenters believe are
analogous. The Treasury Department and the IRS request comments on the adequacy
of the working-capital safe harbor and of ancillary safe harbors that protect a business
during the working capital period, and on whether there is a statutory basis for any
additional relief. Comments are also requested about the appropriateness of any
further expansion of the “working capital” concept beyond the acquisition, construction,
or rehabilitation of tangible business property to the development of business operations
in the opportunity zone.
G. Qualified Opportunity Zone Business.
Under section 1400Z-2(d)(1), a QOF is any investment vehicle organized as a
corporation or partnership for the purpose of investing in qualified opportunity zone
property (other than another QOF). A QOF must hold at least 90 percent of its assets
in qualified opportunity zone property. Compliance with the 90 Percent Asset Test is
determined by the average of the percentage of the qualified opportunity zone
property held in the QOF as measured on the last day of the first 6-month period of
the taxable year of the QOF and on the last day of the taxable year of the QOF.
Under section 1400Z-2(d)(2)(A), the term qualified opportunity zone property

25
includes qualified opportunity zone business property. Qualified opportunity zone
property may also include certain equity interests in an operating subsidiary entity
(either a corporation or a partnership) that qualifies as a qualified opportunity zone
business by satisfying certain requirements pursuant to section 1400Z-2(d)(2)(B) and
(C).
Consequently, if a QOF operates a trade or business directly and does not
hold any equity in a qualified opportunity zone business, at least 90 percent of the
QOF’s assets must be qualified opportunity zone property.
The definition of qualified opportunity zone business property requires
property to be used in a QOZ and also requires new capital to be employed in a
QOZ. Under section 1400Z- 2(d)(2)(D)(i), qualified opportunity zone business
property means tangible property used in a trade or business of a QOF, but only if
(1) the property was acquired by purchase after December 31, 2017; (2) the
original use of the property in the QOZ commences with the QOF, or the QOF
substantially improves the property; and (3) during substantially all of the QOF’s
holding period for the property, substantially all of the use of the property was in a
QOZ.
Under section 1400Z-2(d)(2)(B)(i) and (C), to qualify as a qualified opportunity
zone business, an entity must be a qualified opportunity zone business both (a) when
the QOF acquires its equity interest in the entity and (b) during substantially all of the
QOF’s holding period for that interest. The manner of the QOF’s acquisition of the
equity interest must comply with certain additional requirements.
Under section 1400Z-2(d)(3)(A), for a trade or business to qualify as a

26
qualified opportunity zone business, it must (among other requirements) be one in
which substantially all of the tangible property owned or leased by the taxpayer is
qualified opportunity zone business property.
If an entity qualifies as a qualified opportunity zone business, the value of the
QOF’s entire interest in the entity counts toward the QOF’s satisfaction of the 90
Percent Asset Test. Thus, if a QOF operates a trade or business (or multiple trades
or businesses) through one or more entities, then the QOF can satisfy the 90
Percent Asset Test if each of the entities qualifies as a qualified opportunity zone
business. The minimum amount of qualified opportunity zone business property
owned or leased by a business for it to qualify as a qualified opportunity zone
business is controlled by the meaning of the phrase substantially all in section
1400Z-2(d)(3)(A)(i).
In determining whether an entity is a qualified opportunity zone business, these
proposed regulations propose a threshold to determine whether a trade or business
satisfies the substantially all requirement in section 1400Z-2(d)(3)(A)(i).
If at least 70 percent of the tangible property owned or leased by a trade or
business is qualified opportunity zone business property (as defined section 1400Z2(d)(3)(A)(i)), the trade or business is treated as satisfying the substantially all
requirement in section 1400Z-2(d)(3)(A)(i). The 70 percent threshold provided in these
proposed regulations is intended to apply only to the term “substantially all” as it is used
in section 1400Z-2(d)(3)(A)(i).
The phrase substantially all is also used in several other places in section 1400Z2. That phrase appears in section 1400Z-2(d)(3)(A)(i), in which a qualified opportunity

27
zone business is generally defined as a trade or business “in which substantially all of
the tangible property owned or leased by the taxpayer is qualified opportunity zone
business property (determined by substituting ‘qualified opportunity zone business’ for
‘qualified opportunity fund’ each place it appears in section 1400Z-2(d)](2)(D)).” In
addition, substantially all appears in section 1400Z-2(d)(2)(D)(i)(III), which establishes
the conditions for qualifying as an opportunity zone business property “during
substantially all of the qualified opportunity fund’s holding period for such property,
substantially all of the use of such property was in a qualified opportunity zone” and
section 1400Z-2(d)(2)(B)(ii)(III).
Several requirements of section 1400Z-2(d) use substantially all multiple times in
a row (that is, “substantially all of … substantially all of …substantially all of …”). This
compounded use of substantially all must be interpreted in a manner that does not
result in a fraction that is too small to implement the intent of Congress.
The Treasury Department and the IRS request comments regarding the
proposed meaning of the phrase substantially all in section1400Z-2(d)(3)(A)(i) as
well as in the various other locations in section 1400Z-2(d) where that phrase is
used.
H. Eligible Entities.
The proposed regulations clarify that a QOF must be an entity classified as a
corporation or partnership for Federal income tax purposes. In addition, it must be
created or organized in one of the 50 States, the District of Columbia, or a U.S.
possession. In addition, if an entity is organized in a U.S. possession but not in one of
the 50 States or in the District of Columbia, then it may be a QOF only if it is organized

28
for the purpose of investing in qualified opportunity zone property that relates to a trade
or business operated in the possession in which the entity is organized.
The proposed regulations further clarify that qualified opportunity zone property
may include stock or a partnership interest in an entity classified as a corporation or
partnership for Federal income tax purposes. In addition, it must be a corporation or
partnership created or organized in, or under the laws of, one of the 50 States, the
District of Columbia, or a U.S. possession. Specifically, if an entity is organized in a
U.S. possession but not in one of the 50 States or the District of Columbia, an equity
interest in the entity may be qualified opportunity zone stock or a qualified opportunity
zone partnership interest, as the case may be, only if the entity conducts a qualified
opportunity zone business in the U.S. possession in which the entity is organized.
The proposed regulations further define a U.S. possession to mean any
jurisdiction outside of the 50 States and the District of Columbia in which a designated
qualified opportunity zone exists under section 1400Z-1. This definition may include the
following U.S. territories: American Samoa, Guam, the Commonwealth of the Northern
Mariana Islands, Puerto Rico, and the U.S. Virgin Islands. A complete list of designated
qualified opportunity zones is found in Notice 2018-48, 2018-28 I.R.B. 9.
VII. Section 1400Z-2(e) Investments from Mixed Funds
If only a portion of a taxpayer’s investment in a QOF is subject to the deferral
election under section 1400Z-2(a), then section 1400Z-2(e) requires the investment to
be treated as two separate investments, which receive different treatment for Federal
income tax purposes. Pursuant to section 1400Z-2(e)(1)(B), the proposed regulations
reiterate that a taxpayer may make the election to step-up basis in an investment in a

29
QOF that was held for 10 years or more only if a proper deferral election under section
1400Z-2(a) was made for the investment.
Commenters have questioned whether section 752(a) could result in investments
with mixed funds under section 1400Z-2(e)(1). Section 1400Z-2(e)(1) requires a
taxpayer to treat as two separate investments the combination of an investment to
which a section 1400Z-2(a) gain-deferral election applies and an investment of any
amount to which such an election does not apply. As previously noted, these proposed
regulations clarify that deemed contributions of money under section 752(a) do not
constitute an investment in a QOF; therefore, such a deemed contribution does not
result in the partner having a separate investment under section 1400Z-2(e)(1). Thus, a
partner’s increase in outside basis is not taken into account in determining what portion
of the partner’s interest is subject to the deferral election under section 1400Z-2(a) or
what portion is not subject to the deferral election under section 1400Z-2(a). Comments
are requested on whether other pass-through entities require similar treatment.
Comments are also requested on whether there may be certain circumstances in which
not treating the deemed contribution under section 752(a) as creating a separate
investment for purposes of section 1400Z-2(e)(1) may be considered abusive or
otherwise problematic.
Proposed Effective Date
These regulations generally are proposed to be effective on or after the date of
publication in the Federal Register of a Treasury decision adopting these proposed
rules as final regulations (final regulations publication date). However—

30
•

An eligible taxpayer may rely on the rules of proposed §1.1400Z-2(a)-1 with
respect to eligible gains that would be recognized before the final regulations’
date of applicability, but only if the taxpayer applies the rules in their entirety
and in a consistent manner.

•

A taxpayer may rely on the rules in proposed § 1.1400Z-2(c)-1 with respect to
dispositions of investment interests in QOFs in situations where the
investment was made in connection with an election under section 1400Z2(a) that relates to the deferral of a gain such that the first day of 180-day
period for the gain was before the final regulations’ date of applicability. This
reliance is dependent on the taxpayer’s applying the rules of § 1.1400Z-2(c)-1
in their entirety and in a consistent manner.

•

A QOF may rely on the rules in proposed §1.1400Z-2(d)-1 with respect to
taxable years that begin before the final regulations’ date of applicability, but
only if the QOF applies the rules in their entirety and in a consistent manner.

•

A taxpayer may rely on the rules in proposed § 1.1400Z-2(e)-1 with respect to
investments and deemed contributions of money that occur before the final
regulations’ date of applicability, but only if the taxpayer applies the rules in
their entirety and in a consistent manner.

Special Analyses
I.

Regulatory Planning and Review
Executive Orders 13771, 13563, and 12866 direct agencies to assess costs and

benefits of available regulatory alternatives and, if regulation is necessary, to select
regulatory approaches that maximize net benefits (including potential economic,

31
environmental, public health and safety effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the importance of quantifying both costs and
benefits, reducing costs, harmonizing rules, and promoting flexibility.
These proposed regulations have been designated by the Office of Management
and Budget’s Office of Information and Regulatory Affairs (OIRA) as subject to review
under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11,
2018) between the Treasury Department and the Office of Management and Budget
regarding review of tax regulations. OIRA has determined that the proposed rulemaking
is economically significant and subject to review under EO 12866 and section 1(c) of the
Memorandum of Agreement. The Treasury Department and the IRS believe that
significant investment will flow into qualified opportunity zones as a result of the TCJA
legislation and proposed regulation. This investment is likely to be primarily from other
areas of the United States. Accordingly, the proposed regulations have been reviewed
by the Office of Management and Budget. In addition, the Treasury Department and the
IRS expect the proposed regulation, when final, to be an Executive Order 13771
deregulatory action and request comment on this designation. Details on the costs of
the proposed regulations can be found in this economic analysis.
A. Background and Overview
Congress enacted section 1400Z-2, in conjunction with section 1400Z-1, as a
temporary provision to encourage private sector investment in certain lower-income
communities designated as qualified opportunity zones (see Senate Committee on
Finance, Explanation of the Bill, at 313 (November 22, 2017)). Taxpayers may elect to
defer the recognition of capital gain to the extent of amounts invested in a QOF,

32
provided that the corresponding amounts are invested during the 180-day period
beginning on the date such capital gain would have been recognized by the taxpayer.
Inclusion of the deferred capital gain in income occurs on the date the investment in the
QOF is sold or exchanged, or on December 31, 2026, whichever comes first. For
investments in a QOF held longer than five years, taxpayers may exclude 10 percent of
the deferred gain from inclusion in income, and for investment held longer than seven
years, taxpayers may exclude a total of 15 percent of the deferred gain from inclusion in
income. In addition, for investments held longer than 10 years, the post-acquisition gain
on the qualifying investment in the QOF may also be excluded from income. In turn, a
QOF must hold at least 90 percent of its assets in qualified opportunity zone property,
as measured by the average percentage held at the last day of the first 6-month period
of the taxable year of the fund and the last day of the taxable year. The statute requires
a QOF that fails this 90 percent test to pay a penalty for each month it fails to maintain
the 90-percent asset requirement.
The proposed regulations clarify several terms used in the statute, such as what
type of gains are eligible for this preferential treatment, what type of taxpayers are
eligible, the timing of transactions necessary for satisfying the requirements of the
statute, including the time period for which the exclusion on gains for investments held
longer than 10 years applies, and certain rules related to the creation and continued
qualification of a fund as a QOF.
B. Need for the Proposed Regulations
Taxpayers may be unwilling to make investments in QOFs without first having
additional clarity on which investments in a QOF would qualify to receive the preferential

33
tax treatment specified by the TCJA. This uncertainty could reduce the amount of
investment flowing into lower-income communities designated as qualified opportunity
zones below the congressionally intended effect. The lack of additional clarity could
also lead to different taxpayers interpreting, and therefore applying, the same statute
differently, which could distort the allocation of investment across the qualifying
opportunity zones.
C. Economic Analysis
1. Baseline
The Treasury Department and the IRS have assessed the benefits and costs of
the proposed regulations relative to a no-action baseline reflecting anticipated Federal
income tax-related behavior in the absence of these proposed regulations.
2.

Anticipated benefits

a.

In general
The Treasury Department and the IRS expect that the certainty and clarity

provided by these proposed regulations, relative to the baseline, will enhance U.S.
economic performance under the statute. Under the proposed regulations, taxpayers
are provided clarity on the type and timing of transactions that would qualify for the
beneficial tax treatment provided for investments in QOFs. As a primary benefit, the
clarity provided by these proposed regulations would reduce planning costs for
taxpayers and make it easier for taxpayers to make investment decisions that more
precisely conform to the statutory requirements for QOFs. In addition, the reduction in
uncertainty should encourage investment to flow into qualified opportunity zones,
consistent with the intent of the TCJA.

34
The Treasury Department and the IRS considered various alternatives in the
promulgation of the proposed regulations, with the major ones described in the following
paragraphs. These alternatives included not issuing the proposed regulations under
section 1400Z-2. This path was not chosen for several reasons. The TCJA provides
both a reward in terms preferential tax treatment of deferred gains, but also a penalty if
a QOF does not maintain compliance with the 90-percent asset test. Without the
proposed regulations, some taxpayers may have foregone making promising
investments within a qualifying opportunity zone out of concern that the investment may
later be determined to not be a qualifying investment. As described in the following
paragraphs, the proposed regulations help clarify several areas in which the statutory
language was either ambiguous or not very specific. Overall, the clarity provided by the
proposed regulations should reduce planning costs by taxpayers and enable taxpayers
to make economically efficient decisions given the context of the whole Code.
b.

Clarity regarding eligible gains
The proposed regulations specify that only capital gains are eligible for deferral

and potential exclusion under section 1400Z-2. As discussed in section I.A of the
Explanation of Provisions, there is ambiguity that results from the variation between the
operative statutory text and the section heading in the statute regarding what type of
gains would be eligible for deferral. The Treasury Department and the IRS determined
that Congress intended deferral only to be available to capital gains. This clarity
provided in the proposed regulations would reduce uncertainty for taxpayers regarding
what transactions would qualify for the preferential tax treatment and also reduce
administrative and compliance costs.

35
c.

Clarity regarding application to eligible taxpayers
The proposed regulations also clarify which taxpayers are eligible to defer the

recognition of capital gain through investing in a QOF and describe how different types
of taxpayers may satisfy the requirements for electing to defer capital gain consistent
with the rules of section 1400Z-2 and the overall Code. In particular, the proposed
regulations describe rules for how partnerships and partners in a partnership may invest
in a QOF and elect to defer recognition of capital gains. Partnerships are expected to
be a significant source of funds invested in QOFs. Without these proposed rules
clarifying how partnerships and partners may satisfy the requirements for the
preferential treatment of capital gains, partners may be less willing to invest in a QOF.
The proposed regulations help provide a uniform signal to different types of taxpayers of
the availability of this preferential treatment of capital gains and provide the mechanics
of how these different taxpayers may satisfy the requirements imposed by the statute.
Thus these different types of taxpayers may make decisions that are more economically
efficient contingent on the overall Code.
d.

Clarity regarding electing post-10-year gain exclusion if zone designation expires
Proposed §1.1400Z-2(c)-1 specifies that expiration of a zone designation would

not impair the ability of a taxpayer to elect the exclusion from gains for investments held
for at least 10 years, provided the disposition of the investment occurs prior to January
1, 2048. The Treasury Department and the IRS considered four alternatives regarding
the interaction between the expiration of the designated zones and the election to
exclude gain for investments held more than 10 years. A discussion of the economic
costs and benefits of the four options follows.

36
i.

Remaining silent on electing post-10-year gain exclusion
The first alternative would be for the proposed regulations to remain silent on this

issue. Section 1400Z-2(c) permits a taxpayer to increase the basis in the property held
in a QOF longer than 10 years to be equal to the fair market value of that property on
the date that the investment is sold or exchanged, thus excluding post-acquisition
capital gain on the investment from tax. However, the statutory expiration of the
designation of qualified opportunity zones on December 31, 2028, makes it unclear to
what extent investments in a QOF made after 2018 would qualify for this exclusion.
Some taxpayers may believe that only investments in a QOF made prior to
January 1, 2019, would be eligible for the exclusion from gain if held greater than 10
years. Such taxpayers may rush to complete transactions within 2018, while others
may choose to hold off indefinitely from investing in a QOF until they received clarity on
the availability of the 10-year exclusion from gain for investments made later than 2018.
Other taxpayers may plan to invest in a QOF after 2018 with the expectation that future
regulations would be provided or the statute would be amended to make it clear that
dispositions of assets within a QOF after 2028 would be eligible for exclusion if held
longer than 10 years. The ambiguity of the statute is likely to lead to uneven response
by different taxpayers, dependent on the taxpayer’s interpretation of the statute, which
may lead to an inefficient allocation of investment across qualified opportunity zones.
ii.

Providing a clear deadline for electing post-10-year gain exclusion
The alternative adopted by the proposed regulations clarifies that as long as the

investment in the QOF was made with funds subject to a proper deferral election under
section 1400Z-2(a), which requires the investment to be made prior to June 29, 2027,

37
then the 10-year gain exclusion election is allowed as long as the disposition of the
investment occurs before January 1, 2048. This proposed rule would provide certainty
to taxpayers regarding the timing of investments eligible for the 10-year gain exclusion.
Taxpayers would have a more uniform understanding of what transactions would be
eligible for the favorable treatment on capital gains. This would help taxpayers
determine which investments provide a sufficient return to compensate for the extra
costs and risks of investing in a QOF. This proposed rule would likely lead to an
increase in investment within QOFs compared the proposed regulations remaining
silent on this issue.
However, setting a fixed date for the disposition of eligible QOFs investments
could introduce economic inefficiencies. Some taxpayers may dispose of their
investment in a QOF by the deadline in the proposed regulation primarily in order to
receive the benefit of the gain exclusion, but that selling date may not be optimal for the
taxpayer in terms of the portfolio of assets that the taxpayer could have chosen to invest
in were there no deadline. Setting a fixed deadline may also generate an overall
decline in asset values in some qualified opportunity zones if many investors in QOFs
seek to sell their portion of the fund within the same time period. This decline in asset
values may affect the broader level of economic activity within some qualified
opportunity zones or affect other investors in such zones that did not invest through a
QOF. In anticipation of this fixed deadline, some taxpayers may choose to dispose of
QOF assets earlier than the deadline to avoid an anticipated “rush to the exits,” but this
would seem to conflict with the purpose of the incentives in the statute to encourage
“patient” capital investment within qualified opportunity zones. While the proposed

38
regulations may produce these inefficiencies, by providing a long time period for which
taxpayers may dispose of their investment within a QOF and still qualify for the
exclusion the proposed regulations will lead any such inefficiencies to be minor.
iii.

Providing no deadline for electing gain exclusion
As an alternative, the proposed regulations could have provided no deadline for

electing the 10-year gain exclusion for investments in a QOF, while still stating that the
ability to make the election is not impaired solely because the designation of one or
more qualified opportunity zones ceases to be in effect. While this alternative would
eliminate the economic inefficiencies associated with a fixed deadline and would likely
lead to greater investment in QOFs, it could introduce substantial additional
administrative and compliance costs. Taxpayers would also need to maintain records
and make efforts to maintain compliance with the rules of section 1400Z-2 on an
indefinite basis.
iv.

Providing fair market value basis without disposition of investment
Another alternative considered would allow taxpayers to elect to increase the

basis in their investment in the QOF if held at least 10 years to the fair market value of
the investment without disposing of the property, as long as the election was made prior
to January 1, 2048. (Analogously, the proposed regulations could have provided that,
at the close of business of the day on which a taxpayer first has the ability to make the
10-year gain exclusion election, the basis in the investment automatically sets to the
greater of current basis or the fair market value of the investment.) This alternative
would minimize the economic inefficiencies of the proposed regulations resulting from
taxpayers needing to dispose of their investment in the opportunity zone at a fixed date

39
not related to any factor other than the lapse of time. However, this approach would
require a method of valuing assets that could raise administrative and compliance costs.
It may also require the maintenance of records and trained compliance personnel for
over two decades.
v.

Summary
As discussed in section V.B of the Explanation of Provisions, the Treasury

Department and the IRS have determined the ability to exclude gains for investment
held at least 10 years in a QOF is integral to the TCJA’s purpose of creating qualified
opportunity zones. The proposed regulations provide a uniform signal to all taxpayers
on the availability of this tax incentive, which should encourage greater investment, and
a more efficient distribution of investment, in QOFs than in the absence of these
proposed regulations. The relative costs and benefits of the various alternatives are
difficult to measure and compare. The proposed regulations would likely produce the
lowest compliance and administrative costs among the alternatives and any associated
economic inefficiencies are likely to be small.
e.

Safe harbors for statutory qualifying property tests
Section 1400Z-2 contains several rules limiting taxpayers from benefitting from

the deferral and exclusion of capital gains from income offered by that section without
also locating investment within a qualifying opportunity zone. The proposed regulations
clarify the rules related to nonqualified financial property and what amounts can be held
in cash and cash equivalents as working capital. The statute requires that a QOF must
hold 90 percent of its assets in qualified opportunity zone property, such as owning
stock or a partnership interest in a qualified opportunity zone business. A qualifying

40
opportunity zone business is subject to the requirements of section 1397C(b)(8), that
less than 5 percent of the aggregate adjusted basis of the entity is attributable to
nonqualified financial property. The proposed regulations establish a working capital
safe harbor consistent with section 1397C(e)(1), under which a qualified opportunity
zone business may hold cash or cash equivalents for a period not longer than 31
months and not violate section 1397C(b)(8).
The Treasury Department and the IRS expect that the establishment of safe
harbors under these parameters will provide net economic benefits. Without
specification of the working capital safe harbor, some taxpayers would not invest in a
QOF for fear that the QOF would not be able to deploy the funds soon enough to satisfy
the 90-percent asset test. Thus, this part of the proposed regulations would generally
encourage investment in QOFs by providing greater specificity to how an entity may
consistently satisfy the statutory requirements for maintaining a QOF without penalty. In
addition, this part of the proposed regulations minimizes the distortion that may arise
between purchasing existing property and sufficiently rehabilitating that property versus
constructing new property, as the time frame specified under the statute and proposed
regulations are similar (30 months after acquisition for rehabilitating existing property
versus 31 months for acquiring and rehabilitating existing property or for constructing
new property).
A longer or a shorter period could have been chosen for the working capital safe
harbor. A shorter time period would minimize the ability of taxpayers to use the
investment in a QOF as a way to lower taxes without actually investing in tangible
assets within a qualified opportunity zone, but taxpayers may also forego legitimate

41
investments within an opportunity zone out of concern of not being able to deploy the
working capital fast enough to meet the requirements. A longer period would have the
opposite effects. Taxpayers could potentially invest in a QOF and receive the benefits
of the tax incentive for multiple years before the money is invested into a qualified
opportunity zone.
f.

Definition of substantially all
The proposed regulations specify that if at least 70 percent of the tangible

property owned or leased by a trade or business is qualified opportunity zone business
property, then the trade or business is treated as satisfying the substantially all
requirement of section 1400Z-2(d)(3)(A)(i). This clarity would provide taxpayers greater
certainty when evaluating potential investment opportunities as to whether the potential
investment would satisfy the statutory requirements.
However, the 70 percent requirement for a trade or business will give QOFs an
incentive to invest in a qualified opportunity zone business rather than owning qualified
opportunity zone business property directly. For example, consider a QOF with $10
million in assets that plans to invest 100 percent of its assets in real property. If it held
the real property directly, then at least $9 million (90 percent) of the property must be
located within an opportunity zone to satisfy the 90 percent asset test for the QOF. If
instead, it invests in a subsidiary that then holds real property, then only $7 million (70
percent) of the property must be located within an opportunity zone. In addition, if the
QOF only invested $9 million into the subsidiary, which then held 70 percent of its
property within an opportunity zone, the investors in the QOF could receive the statutory

42
tax benefits while investing only $6.3 million (63 percent) of its assets within a qualified
opportunity zone.
The Treasury Department and the IRS also considered setting this “substantially
all” threshold at 90 percent. This would reduce, but not eliminate, the incentive the QOF
has to invest in a qualified opportunity zone business rather than directly owning
qualified opportunity zone business property compared to the 70 percent threshold.
Please see earlier discussion and request for comment regarding this definition for
additional detail.
3. Anticipated impacts on administrative and compliance costs
The Treasury Department and the IRS anticipate decreased taxpayer compliance
costs resulting from the proposed regulations due to the greater taxpayer certainty
regarding how to comply with the requirements set forth in the statute. The Treasury
Department also anticipates decreased administrative and enforcement costs for the
IRS.
D.

Paperwork Reduction Act
The collection of information in these proposed regulations with respect to QOFs

is in proposed §1.1400Z-2(d)-1. The collection of information in proposed §1.1400Z2(d)-1 is satisfied by submitting a new reporting form, Form 8996, Qualified Opportunity
Fund, with an income tax return. For purposes of the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)) (PRA), the reporting burden associated with proposed §1.1400Z2(d)-1 will be reflected in the Paperwork Reduction Act submission associated with new
Form 8996 (OMB control number 1545-0123). Notice of the availability of the draft
Form 8996 and request for comment will be available at IRS.gov/DraftForms. In

43
addition, the Treasury Department and the IRS request comments on any aspect of this
collection in this proposed rulemaking.
The collection of information in proposed §1.1400Z-2(d)-1 requires each QOF, be
it a corporation or partnership, to file a Form 8996 to certify that it is organized to invest
in qualified opportunity zone property. In addition, a QOF files Form 8996 annually to
certify that the qualified opportunity fund meets the investment standards of section
1400Z-2 or to figure the penalty if it fails to meet the investment standards.
II.

Regulatory Flexibility Act
Under the Regulatory Flexibility Act (RFA) (5 U.S.C. chapter 6), it is hereby

certified that these proposed regulations, if adopted, would not have a significant
economic impact on a substantial number of small entities that are directly affected by
the proposed regulations. Therefore, a regulatory flexibility analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Although there is a lack
of available data regarding the extent to which small entities invest in QOFs, this
certification is based on the belief of the Treasury Department and the IRS that these
funds will generally involve investments made by larger entities and investments are
entirely voluntary. The Treasury Department and the IRS specifically solicit comment
from any party, particularly affected small entities, on the accuracy of this certification.
Pursuant to section 7805(f), this notice of proposed rulemaking has been
submitted to the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.

44
III.

Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that

agencies assess anticipated costs and benefits and take certain other actions before
issuing a final rule that includes any Federal mandate that may result in expenditures in
any one year by a state, local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for inflation. In 2018, that
threshold is approximately $150 million. This rule does not include any Federal
mandate that may result in expenditures by state, local, or tribal governments, or by the
private sector in excess of that threshold.
IV.

Executive Order 13132: Federalism
Executive Order 13132 (entitled “Federalism”) prohibits an agency from

publishing any rule that has federalism implications if the rule either imposes
substantial, direct compliance costs on state and local governments, and is not required
by statute, or preempts state law, unless the agency meets the consultation and funding
requirements of section 6 of the Executive Order. This proposed rule does not have
federalism implications and does not impose substantial direct compliance costs on
state and local governments or preempt state law within the meaning of the Executive
Order.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, and Notices cited in this preamble
are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available
from the Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS web site at http://www.irs.gov.

45
Comments
Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic and written comments that are submitted
timely to the IRS as prescribed in this preamble under the “ADDRESSES” heading.
The Treasury Department and the IRS request comments on all aspects of the
proposed rules. All comments will be available at http://www.regulations.gov or upon
request.
Drafting Information
The principal author of these proposed regulations is Erika C. Reigle, Office of
Associate Chief Counsel (Income Tax & Accounting). However, other personnel from
the Treasury Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income Taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR Part 1 is proposed to be amended as follows:
Part 1—INCOME TAX
Paragraph 1. The authority citation for part 1 is amended by adding entries in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805***
Section 1.1400Z-2(a)-1 also issued under 26 U.S.C. 1400Z-2(e)(4).
Section 1.1400Z-2(c)-1 also issued under 26 U.S.C. 1400Z-2(e)(4).
Section 1.1400Z-2(d)-1 also issued under 26 U.S.C. 1400Z-2(e)(4).
Section 1.1400Z-2(e)-1 also issued under 26 U.S.C. 1400Z-2(e)(4).

46
Par. 2. Section 1.1400Z-2(a)-1 is added to read as follows:
§1.1400Z-2(a)-1 Deferring tax on capital gains by investing in opportunity zones.
(a) In general. Under section 1400Z-2(a) of the Internal Revenue Code (Code)
and this section, an eligible taxpayer may elect to defer recognition of some or all of its
eligible gains to the extent that the taxpayer timely invests (as provided for by section
1400Z-2(a)(1)(A)) in eligible interests of a qualified opportunity fund (QOF), as defined
in section 1400Z-2(d)(1). Paragraph (b) of this section defines eligible taxpayers,
eligible gains, and eligible interests and contains related operational rules. Paragraph
(c) of this section provides rules for applying section 1400Z-2 to a partnership,
S corporation, trust, or estate that recognizes an eligible gain or would recognize such a
gain if it did not elect to defer the gain under section 1400Z-2(a).
(b) Definitions and related operating rules. The following definitions and rules
apply for purposes of section 1400Z-2 and the regulations thereunder:
(1) Eligible taxpayer. An eligible taxpayer is a person that may recognize gains
for purposes of Federal income tax accounting. Thus, eligible taxpayers include
individuals; C corporations, including regulated investment companies (RICs) and real
estate investment trusts (REITs); partnerships; S corporations; trusts and estates. An
eligible taxpayer may elect to defer recognition of one or more eligible gains in
accordance with the requirements of section 1400Z-2.
(2) Eligible gain--(i) In general. An amount of gain is an eligible gain, and thus is
eligible for deferral under section 1400Z-2(a), if the gain-(A) Is treated as a capital gain for Federal income tax purposes;

47
(B) Would be recognized for Federal income tax purposes before January 1,
2027, if section 1400Z-2(a)(1) did not apply to defer recognition of the gain; and
(C) Does not arise from a sale or exchange with a person that, within the
meaning of section 1400Z-2(e)(2), is related to the taxpayer that recognizes the gain or
that would recognize the gain if section 1400Z-2(a)(1) did not apply to defer recognition
of the gain.
(ii) Gain not already subject to an election. In the case of a taxpayer who has
made an election under section 1400Z-2(a) with respect to some but not all of an
eligible gain, the term “eligible gain” includes the portion of that eligible gain with respect
to which no election has yet been made.
(iii) Gains under section 1256 contracts--(A) General rule. The only gain arising
from section 1256 contracts that is eligible for deferral under section 1400Z-2(a)(1) is
capital gain net income for a taxable year. This net amount is determined by taking into
account the capital gains and losses for a taxable year on all of a taxpayer’s section
1256 contracts, including all amounts determined under section 1256(a), both those
determined on the last business day of a taxable year and those that section 1256(c)
requires to be determined under section 1256(a) because of the termination or transfer
during the taxable year of the taxpayer’s position with respect to a contract. The 180day period with respect to any capital gain net income from section 1256 contracts for a
taxable year begins on the last day of the taxable year, and the character of that gain
when it is later included under section 1400Z-2(a)(1)(B) and (b) is determined under the
general rule in paragraph (b)(5) of this section. See paragraph (b)(2)(iii)(B) of this

48
section for limitations on the capital gains eligible for deferral under this paragraph
(b)(2)(iii)(A).
(B) Limitation on deferral for gain from 1256 contracts. If, at any time during the
taxable year, any of the taxpayer’s section 1256 contracts was part of an offsetting
positions transaction (as defined in paragraph (b)(2)(iv) of this section) and any other
position in that transaction was not a section 1256 contract, then no gain from any
section 1256 contract is an eligible gain with respect to that taxpayer in that taxable
year.
(iv) No deferral for gain from a position that is or has been part of an offsettingpositions transaction. If a capital gain is from a position that is or has been part of an
offsetting-positions transaction, the gain is not eligible for deferral under section 1400Z2(a)(1). For purposes of this paragraph (b)(2)(iv), an offsetting-positions transaction is a
transaction in which a taxpayer has substantially diminished the taxpayer's risk of loss
from holding one position with respect to personal property by holding one or more
other positions with respect to personal property (whether or not of the same kind). It
does not matter whether either of the positions is with respect to actively traded
personal property. An offsetting-positions transaction includes a straddle as defined in
section 1092 and the regulations thereunder, including section 1092(d)(4), which
provides rules for positions held by related persons and certain flow-through entities (for
example, a partnership). An offsetting-positions transaction also includes a transaction
that would be a straddle (taking into account the principles referred to in the preceding
sentence) if the straddle definition did not contain the active trading requirement in
section 1092(d)(1). For example, an offsetting-positions transaction includes positions

49
in closely held stock or other non-traded personal property and substantially offsetting
derivatives.
(3) Eligible interest--(i) In general. For purposes of section 1400Z-2, an eligible
interest in a QOF is an equity interest issued by the QOF, including preferred stock or a
partnership interest with special allocations. Thus, the term eligible interest excludes
any debt instrument within the meaning of section 1275(a)(1) and §1.1275-1(d).
(ii) Use as collateral permitted. Provided that the eligible taxpayer is the owner of
the equity interest for Federal income tax purposes, status as an eligible interest is not
impaired by using the interest as collateral for a loan, whether as part of a purchasemoney borrowing or otherwise.
(iii) Deemed contributions not constituting investment. See §1.1400Z-2(e)1(a)(2) for rules regarding deemed contributions of money to a partnership pursuant to
section 752(a).
(4) 180-day period--(i) In general. Except as otherwise provided elsewhere in
this section, the 180-day period referred to in section 1400Z-2(a)(1)(A) with respect to
any eligible gain (180-day period) begins on the day on which the gain would be
recognized for Federal income tax purposes if the taxpayer did not elect under section
1400Z-2 to defer recognition of that gain.
(ii) Examples. The following examples illustrate the principles of
paragraph (b)(4)(i) of this section.
Example 1. Regular-way trades of stock. If stock is sold at a gain in a regularway trade on an exchange, the 180-day period with respect to the gain on the stock
begins on the trade date.
Example 2. Capital gain dividends received by RIC and REIT shareholders. If an
individual RIC or REIT shareholder receives a capital gain dividend (as described in

50
section 852(b)(3) or section 857(b)(3)), the shareholder’s 180-day period with respect to
that gain begins on the day on which the dividend is paid.
Example 3. Undistributed capital gains received by RIC and REIT shareholders.
If section 852(b)(3)(D) or section 857(b)(3)(D) (concerning undistributed capital gains)
requires the holder of shares in a RIC or REIT to include an amount in the shareholder’s
long-term capital gains, the shareholder’s 180-day period with respect to that gain
begins on the last day of the RIC or REIT’s taxable year.
Example 4. Additional deferral of previously deferred gains--(i) Facts. Taxpayer A
invested in a QOF and properly elected to defer realized gain. During 2025, taxpayer A
disposes of its entire investment in the QOF in a transaction that, under
section 1400Z-2(a)(1)(B) and (b), triggers an inclusion of gain in A’s gross income.
Section 1400Z-2(b) determines the date and amount of the gain included in A’s income.
That date is the date on which A disposed of its entire interest in the QOF. A wants to
elect under section 1400Z-2 to defer the amount that is required to be included in
income.
(ii) Analysis. Under paragraph (b)(4)(i) of this section, the 180-day period for
making another investment in a QOF begins on the day on which section 1400Z-2(b)
requires the prior gain to be included. As prescribed by section 1400Z-2(b)(1)(A), that is
the date of the inclusion-triggering disposition. Thus, in order to make a deferral
election under section 1400Z-2, A must invest the amount of the inclusion in the original
QOF or in another QOF during the 180-day period beginning on the date when A
disposed of its entire investment in the QOF.
(5) Attributes of gains that section 1400Z-2(a)(1)(B) includes in income. If
section 1400Z-2(a)(1)(B) and (b) require a taxpayer to include in income some or all of a
previously deferred gain, the gain so included has the same attributes in the taxable
year of inclusion that it would have had if tax on the gain had not been deferred. These
attributes include those taken into account by sections 1(h), 1222, 1256, and any other
applicable provisions of the Code.
(6) First-In, First-Out (FIFO) method to identify which interest in a QOF has been
disposed of--(i) FIFO requirement. If a taxpayer holds investment interests with
identical rights (fungible interests) in a QOF that were acquired on different days and if,
on a single day, the taxpayer disposes of less than all of these interests, then the first-

51
in-first-out (FIFO) method must be used to identify which interests were disposed of.
Fungible interests may be equivalent shares of stock in a corporation or partnership
interests with identical rights.
(ii) Consequences of identification. The FIFO method determines--(A) Whether
an investment is described in section 1400Z-2(e)(1)(A)(i) (an investment to which a gain
deferral election under section 1400Z-2(a) applies) or section 1400Z-2(e)(1)(A)(ii) (an
investment which was not part of a gain deferral election under section 1400Z-2(a));
(B) In the case of investments described in section 1400Z-2(e)(1)(A)(i), the
attributes of the gain subject to a deferral election under section 1400Z-2(a), at the time
the gain is included in income (the attributes addressed in paragraph (b)(5) of this
section); and
(C) The extent, if any, of an increase under section 1400Z-2(b)(2)(B) in the basis
of an investment interest that is disposed of.
(7) Pro-rata method. If, after application of the FIFO method, a taxpayer is
treated as having disposed of less than all of the investment interests that the taxpayer
acquired on one day and if the interests acquired on that day vary with respect to the
characteristics described in paragraph (b)(6)(ii) of this section, then a proportionate
allocation must be made to determine which interests were disposed of (pro-rata
method).
(8) Examples. The following examples illustrate the rules of paragraph (b)(5)
through (7) of this section.
Example 1. Short-term gain. For 2018, taxpayer B properly made an election
under section 1400Z-2 to defer $100 of gain that, if not deferred, would have been
recognized as short-term capital gain, as defined in section 1222(1). In 2022, section

52
1400Z-2(a)(1)(B) and (b) requires taxpayer B to include the gain in gross income.
Under paragraph (b)(5) of this section, the gain included is short-term capital gain.
Example 2. Collectibles gain. For 2018, taxpayer C properly made an election
under section 1400Z-2 to defer a gain that, if not deferred, would have been collectibles
gain as defined in IRC section 1(h)(5). In a later taxable year, section 1400Z-2(a)(1)(B)
and (b) requires some or all of that deferred gain to be included in gross income. The
gain included is collectibles gain.
Example 3. Net gains from section 1256 contracts. For 2019, taxpayer D had
$100 of capital gain net income from section 1256 contracts. D timely invested $100 in
a QOF and properly made an election under section 1400Z-2 to defer that $100 of gain.
In 2023, section 1400Z-2(a)(1)(B) and (b) requires taxpayer D to include that deferred
gain in gross income. Under paragraph (b)(5) of this section, the character of the
inclusion is governed by section 1256(a)(3) (which requires a 40:60 split between shortterm and long-term capital gain). Accordingly, $40 of the inclusion is short-term capital
gain and $60 of the inclusion is long-term capital gain.
Example 4. FIFO method. For 2018, taxpayer E properly made an election
under section 1400Z-2 to defer $300 of short-term capital gain. For 2020, E properly
made a second election under section 1400Z-2 to defer $200 of long-term capital gain.
In both cases, E properly invested in QOF Q the amount of the gain to be deferred. The
two investments are fungible interests and the price of the interests was the same at the
time of the two investments. E did not purchase any additional interest in QOF Q or sell
any of its interest in QOF Q until 2024, when E sold for a gain 60 percent of its interest
in QOF Q. Under paragraph (b)(6)(i) of this section, E must apply the FIFO method to
identify which investments in QOF Q that E disposed of. As determined by this
identification, E sold the entire 2018 initial investment in QOF Q. Under section 1400Z2(a)(1)(B) and (b), the sale triggered an inclusion of deferred gain. Because the
inclusion has the same character as the gain that had been deferred, the inclusion is
short-term capital gain.
Example 5. FIFO method. In 2018, before Corporation R became a QOF,
Taxpayer F invested $100 cash to R in exchange for 100 R common shares. Later in
2018, after R was a QOF, F invested $500 cash to R in exchange for 400 R common
shares and properly elected under section 1400Z-2 to defer $500 of independently
realized short-term capital gain. Even later in 2018, on different days, F realized $300
of short-term capital gain and $700 of long-term capital gain. On a single day that fell
during the 180-day period for both of those gains, F invested $1,000 cash in R in
exchange for 800 R common shares and properly elected under section 1400Z-2 to
defer the two gains. In 2020, F sold 100 R common shares. Under paragraph (b)(6)(i)
of this section, F must apply the FIFO method to identify which investments in R F
disposed of. As determined by that identification, F sold the initially acquired 100 R
common shares, which were not part of a deferral election under section 1400Z-2. R
must recognize gain or loss on the sale of its R shares under the generally applicable
Federal income tax rules, but the sale does not trigger an inclusion of any deferred gain.

53

Example 6. FIFO method. The facts are the same as example 5, except that, in
addition, during 2021 F sold an additional 400 R common shares. Under paragraph
(b)(6)(i) of this section, F must apply the FIFO method to identify which investments in R
were disposed of. As determined by this identification, F sold the 400 common shares
which were associated with the deferral of $500 of short-term capital gain. Thus, the
deferred gain that must be included upon sale of the 400 R common shares is shortterm capital gain.
Example 7. Pro-rata method. The facts are the same as in examples 5 and 6,
except that, in addition, during 2022 F sold an additional 400 R common shares. Under
paragraph (b)(6)(i) of this section, F must apply the FIFO method to identify which
investments in R were disposed of. In 2022, F is treated as holding only the 800 R
common shares purchased on a single day, and the section 1400Z-2 deferral election
associated with these shares applies to gain with different characteristics (described in
paragraph (b)(6)(ii) of this section). Under paragraph (b)(7) of this section, therefore, R
must use the pro-rata method to determine which of the characteristics pertain to the
deferred gain required to be included as a result of the sale of the 400 R common
shares. Under the pro-rata method, $150 of the inclusion is short-term capital gain
($300 ×400/800) and $350 is long-term capital gain ($700 × 400/800).
(c) Special rules for pass-through entities--(1) Eligible gains that a partnership
elects to defer. A partnership is an eligible taxpayer under paragraph (b)(1) of this
section and may elect to defer recognition of some or all of its eligible gains under
section 1400Z-2(a)(2).
(i) Partnership election. If a partnership properly makes an election under section
1400Z-2(a)(2), then-(A) The partnership defers recognition of the gain under the rules of section
1400Z-2 (that is, the partnership does not recognize gain at the time it otherwise would
have in the absence of the election to defer gain recognition);
(B) The deferred gain is not included in the distributive shares of the partners
under section 702 and is not subject to section 705(a)(1); and
(ii) Subsequent recognition. Absent any additional deferral under section 1400Z2(a)(1)(A), any amount of deferred gain that an electing partnership subsequently must

54
include in income under sections 1400Z-2(a)(1)(B) and (b) is recognized by the electing
partnership at the time of inclusion and is subject to sections 702 and 705(a)(1) in a
manner consistent with recognition at that time.
(2) Eligible gains that the partnership does not defer--(i) Tax treatment of the
partnership. If a partnership does not elect to defer some, or all, of the gains for which it
could make a deferral election under section 1400Z-2, the partnership’s treatment of
any such amounts is unaffected by the fact that the eligible gain could have been
deferred under section 1400Z-2.
(ii) Tax treatment by the partners. If a partnership does not elect to defer some,
or all, of the gains for which it could make a deferral election under section 1400Z-2-(A) The gains for which a deferral election are not made are included in the
partners’ distributive shares under section 702 and are subject to section 705(a)(1);
(B) If a partner’s distributive share includes one or more gains that are eligible
gains with respect to the partner, the partner may elect under section 1400Z-2(a)(1)(A)
to defer some or all of its eligible gains; and
(C) A gain in a partner’s distributive share is an eligible gain with respect to the
partner only if it is an eligible gain with respect to the partnership and it did not arise
from a sale or exchange with a person that, within the meaning of section 1400Z2(e)(2), is related to the partner.
(iii) 180-day period for a partner electing deferral--(A) General rule. If a partner’s
distributive share includes a gain that is described in paragraph (c)(2)(ii)(C) of this
section (gains that are eligible gains with respect to the partner), the 180-day period
with respect to the partner’s eligible gains in the partner’s distributive share generally

55
begins on the last day of the partnership taxable year in which the partner’s allocable
share of the partnership’s eligible gain is taken into account under section 706(a).
(B) Elective rule. Notwithstanding the general rule in paragraph (c)(2)(iii)(A) of
this section, if a partnership does not elect to defer all of its eligible gain, the partner
may elect to treat the partner’s own 180-day period with respect to the partner’s
distributive share of that gain as being the same as the partnership’s 180-day period.
(C) The following example illustrates the principles of this paragraph (c)(2)(iii).
Example. Five individuals have identical interests in partnership P, there are no
other partners, and P’s taxable year is the calendar year. On January 17, 2019, P
realizes a capital gain of $1000x that it decides not to elect to defer. Two of the
partners, however, want to defer their allocable portions of that gain. One of these two
partners invests $200x in a QOF during February 2020. Under the general rule in
paragraph (c)(2)(iii)(A) of this section, this investment is within the 180-day period for
that partner (which begins on December 31, 2019). The fifth partner, on the other hand,
decides to make the election provided in paragraph (c)(2)(iii)(B) of this section and
invests $200x in a QOF during February 2019. Under that elective rule, this investment
is within the 180-day period for that partner (which begins on January 17, 2019).
(3) Pass-through entities other than partnerships. If an S corporation; a trust; or
a decedent’s estate recognizes an eligible gain, or would recognize an eligible gain if it
did not elect to defer recognition of the gain under section 1400Z-2(a), then rules
analogous to the rules of paragraph (c)(1) and (2) of this section apply to that entity and
to its shareholders or beneficiaries, as the case may be.
(d) Elections. The Commissioner may prescribe in guidance published in the
Internal Revenue Bulletin or in forms and instructions (see §§ 601.601(d)(2) and
601.602 of this chapter), both the time, form, and manner in which an eligible taxpayer
may elect to defer eligible gains under section 1400Z-2(a) and also the time, form, and
manner in which a partner may elect to apply the elective 180-day period provided in
paragraph (c)(2)(iii)(B) of this section.

56
(e) Applicability date. This section applies to eligible gains that would be
recognized in the absence of deferral on or after the date of publication in the Federal
Register of a Treasury decision adopting these proposed rules as final regulations. An
eligible taxpayer, however, may rely on the proposed rules in this section with respect to
eligible gains that would be recognized before that date, but only if the taxpayer applies
the rules in their entirety and in a consistent manner.
Par. 3. Section 1.1400Z-2(c)-1 is added to read as follows:
§1.1400Z-2(c)-1 Investments held for at least 10 years.
(a) Limitation on the 10-year rule. As required by section 1400Z-2(e)(1)(B)
(treatment of investments with mixed funds), section 1400Z-2(c) (special rule for
investments held for at least 10 years) applies only to the portion of an investment in a
QOF with respect to which a proper election to defer gain under section 1400Z-2(a)(1)
is in effect.
(b) Extension of availability of the election described in section 1400Z-2(c). The
ability to make an election under section 1400Z-2(c) for investments held for at least 10
years is not impaired solely because, under section 1400Z-1(f), the designation of one
or more qualified opportunity zones ceases to be in effect. The preceding sentence
does not apply to elections under section 1400Z-2(c) that are related to dispositions
occurring after December 31, 2047.
(c) Examples. The following examples illustrate the principles of paragraphs (a)
and (b) of this section.
Example 1. (i) Facts. In 2020, taxpayer G invests $100 in QOF S in exchange
for 100 common shares of QOF S and properly makes an election under section 1400Z2(a) to defer $100 of gain. G also acquires 200 additional common shares in QOF in
exchange for $z. G does not make a section 1400Z-2(a) deferral election with respect

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to any of the $z investments. At the end of 2028, the qualified opportunity zone
designation expires for the population census tract in which QOF S primarily conducts
its trade or business. In 2031, G sells all of its 300 QOF S shares, realizes gain, and
makes an election to increase the qualifying basis in G’s QOF S shares to fair market
value. But for the expiration of the designated zones in section 1400Z-1(f), QOF S and
G’s conduct is consistent with continued eligibility to make the election under section
1400Z-2(c).
(ii) Analysis. Under paragraph (b) of this section, although the designation
expired on December 31, 2028, the expiration of the zone’s designation does not,
without more, invalidate G’s ability to make an election under section 1400Z-2(c).
Accordingly, pursuant to that election, G’s basis is increased in the one-third portion of
G’s investment in QOF S with respect to which G made a proper deferral election under
section 1400Z-2(a)(2) (100 common shares / 300 common shares). Under section
1400Z-2(e)(1) and paragraph (a) of this section, however, the election under section
1400Z-2(c) is unavailable for the remaining two-thirds portion of G’s investment in QOF
S because G did not make a deferral election under section 1400Z-2(a)(2) for this
portion of its investment in QOF S (200 common shares / 300 common shares).
(d) Applicability date. This section applies to an election under section 1400Z2(c) related to dispositions made after the date of publication in the Federal Register of
a Treasury decision adopting these proposed rules as final regulations. A taxpayer,
however, may rely on the proposed rules in this section with respect to dispositions of
investment interests in QOFs in situations where the investment was made in
connection with an election under section 1400Z-2(a) that relates to the deferral of a
gain such that the first day of 180-day period for the gain was before the date of
applicability of that section. The preceding sentence applies only if the taxpayer applies
the rules of this section in their entirety and in a consistent manner.
Par. 4. Section 1.1400Z-2(d)-1 is added to read as follows:
§1.1400Z-2(d)-1 Qualified Opportunity Funds.
(a) Becoming a QOF-(1) Self-certification. Except as provided in
paragraph (e)(1) of this section, if a taxpayer that is classified as a corporation or
partnership for Federal tax purposes is eligible to be a QOF, the taxpayer may self-

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certify that it is QOF. This section refers to such a taxpayer as an eligible entity. The
following rules apply to the self-certification:
(i) Time, form, and manner. The self-certification must be effected at such time
and in such form and manner as may be prescribed by the Commissioner in IRS forms
or instructions or in publications or guidance published in the Internal Revenue Bulletin
(see §§ 601.601(d)(2) and 601.602 of this chapter).
(ii) First taxable year. The self-certification must identify the first taxable year that
the eligible entity wants to be a QOF.
(iii) First month. The self-certification may identify the first month (in that initial
taxable year) in which the eligible entity wants to be a QOF.
(A) Failure to specify first month. If the self-certification fails to specify the month
in the initial taxable year that the eligible entity first wants to be a QOF, then the first
month of the eligible entity’s initial taxable year as a QOF is the first month that the
eligible entity is a QOF.
(B) Investments before first month not eligible for deferral. If an investment in
eligible interests of an eligible entity occurs prior to the eligible entity’s first month as a
QOF, any election under section 1400Z-2(a)(1) made for that investment is invalid.
(2) Becoming a QOF in a month that is not the first month of the taxable year. If
an eligible entity’s self-certification as a QOF is first effective for a month that is not the
first month of that entity’s taxable year-(i) For purposes of section 1400Z-2(d)(1)(A) and (B) in the first year of the QOF’s
existence, the phrase first 6-month period of the taxable year of the fund means the first
6 months each of which is in the taxable year and in each of which the entity is a QOF.

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Thus, if an eligible entity becomes a QOF in the seventh or later month of a 12-month
taxable year, the 90-percent test in section 1400Z-2(d)(1) takes into account only the
QOF’s assets on the last day of the taxable year.
(ii) The computation of any penalty under section 1400Z-2(f)(1) does not take into
account any months before the first month in which an eligible entity is a QOF.
(3) Pre-existing entities. There is no legal barrier to a pre-existing eligible entity
becoming a QOF, but the eligible entity must satisfy all of the requirements of section
1400Z-2 and the regulations thereunder, including the requirements regarding qualified
opportunity zone property, as defined in section 1400Z-2(d)(2). In particular, that
property must be acquired after December 31, 2017.
(b) Valuation of assets for purposes of the 90-percent asset test--(1) In general.
For a taxable year, if a QOF has an applicable financial statement within the meaning of
§1.475(a)-4(h), then the value of each asset of the QOF for purposes of the 90-percent
asset test in section 1400Z-2(d)(1) is the value of that asset as reported on the QOF’s
applicable financial statement for the relevant reporting period.
(2) QOF without an applicable financial statement. If paragraph (b)(1) of this
section does not apply to a QOF, then the value of each asset of the QOF for purposes
of the 90-percent asset test in section 1400Z-2(d)(1) is the QOF’s cost of the asset.
(c) Qualified opportunity zone property--(1) In general. Pursuant to section
1400Z-2(d)(2)(A), the following property is qualified opportunity zone property:
(i) Qualified opportunity zone stock as defined in paragraph (c)(2) of this section,
(ii) Qualified opportunity zone partnership interest as defined in paragraph (c)(3)
of this section, and

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(iii) Qualified opportunity zone business property as defined in paragraph (c)(4) of
this section.
(2) Qualified opportunity zone stock--(i) In general. Except as provided in
paragraphs (c)(2)(ii) and (e)(2) of this section, if an entity is classified as a corporation
for Federal tax purposes (corporation), then an equity interest (stock) in the entity is
qualified opportunity zone stock if-(A) The stock is acquired by a QOF after December 31, 2017, at its original issue
(directly or through an underwriter) from the corporation solely in exchange for cash,
(B) As of the time the stock was issued, the corporation was a qualified
opportunity zone business as defined in section 1400Z-2(d)(3) and paragraph (d) of this
section (or, in the case of a new corporation, the corporation was being organized for
purposes of being such a qualified opportunity zone business), and
(C) During substantially all of the QOF’s holding period for the stock, the
corporation qualified as a qualified opportunity zone business as defined in section
1400Z-2(d)(3) and paragraph (d) of this section.
(ii) Redemptions of stock. Pursuant to section 1400Z-2(d)(2)(B)(ii), rules similar
to the rules of section 1202(c)(3) apply for purposes of determining whether stock in a
corporation qualifies as qualified opportunity zone stock.
(A) Redemptions from taxpayer or related person. Stock acquired by a QOF is
not treated as qualified opportunity zone stock if, at any time during the 4-year period
beginning on the date 2 years before the issuance of the stock, the corporation issuing
the stock purchased (directly or indirectly) any of its stock from the QOF or from a
person related (within the meaning of section 267(b) or 707(b)) to the QOF. Even if the

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purchase occurs after the issuance, the stock was never qualified opportunity zone
stock.
(B) Significant redemptions. Stock issued by a corporation is not treated as
qualified opportunity zone stock if, at any time during the 2-year period beginning on the
date 1 year before the issuance of the stock, the corporation made 1 or more purchases
of its stock with an aggregate value (as of the time of the respective purchases)
exceeding 5 percent of the aggregate value of all of its stock as of the beginning of the
2-year period. Even if one or more of the disqualifying purchases occurs after the
issuance, the stock was never qualified opportunity zone stock.
(C) Treatment of certain transactions. If any transaction is treated under
section 304(a) as a distribution in redemption of the stock of any corporation, for
purposes of paragraphs (c)(2)(ii)(A) and (B) of this section, that corporation is treated as
purchasing an amount of its stock equal to the amount that is treated as such a
distribution under section 304(a).
(3) Qualified opportunity zone partnership interest. Except as provided in
paragraph (e)(2) of this section, if an entity is classified as a partnership for Federal tax
purposes (partnership), any capital or profits interest (partnership interest) in the entity
is a qualified opportunity zone partnership interest if-(i) The partnership interest is acquired by a QOF after December 31, 2017, from
the partnership solely in exchange for cash,
(ii) As of the time the partnership interest was acquired, the partnership was a
qualified opportunity zone business as defined in section 1400Z-2(d)(3) and

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paragraph (d) of this section (or, in the case of a new partnership, the partnership was
being organized for purposes of being a qualified opportunity zone business), and
(iii) During substantially all of the QOF’s holding period for the partnership
interest, the partnership qualified as a qualified opportunity zone business as defined in
section 1400Z-2(d)(3) and paragraph (d) of this section.
(4) Qualified opportunity zone business property of a QOF. Tangible property
used in a trade or business of a QOF is qualified opportunity zone business property for
purposes of paragraph (c)(1)(iii) of this section if-(i) The tangible property satisfies section 1400Z-2(d)(2)(D)(i)(I);
(ii) The original use of the tangible property in the qualified opportunity zone,
within the meaning of paragraph (c)(7) of this section, commences with the QOF, or the
QOF substantially improves the tangible property within the meaning of paragraph (c)(8)
of this section (which defines substantial improvement in this context); and
(iii) During substantially all of the QOF’s holding period for the tangible property,
substantially all of the use of the tangible property was in a qualified opportunity zone.
(5) Substantially all of a QOF’s holding period for property described in
paragraphs (c)(2), (c)(3), and (c)(4) of this section. [Reserved].
(6) Substantially all of the usage of tangible property by a QOF in a qualified
opportunity zone. [Reserved].
(7) Original use of tangible property. [Reserved].
(8) Substantial improvement of tangible property--(i) In general. Except as
provided in paragraph (c)(8)(ii) of this section, for purposes of paragraph (c)(4)(ii) of this
section, tangible property is treated as substantially improved by a QOF only if, during

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any 30-month period beginning after the date of acquisition of the property, additions to
the basis of the property in the hands of the QOF exceed an amount equal to the
adjusted basis of the property at the beginning of the 30-month period in the hands of
the QOF.
(ii) Special rules for land and improvements on land--(A) Buildings located in the
zone. If a QOF purchases a building located on land wholly within a QOZ, under
section 1400Z-2(d)(2)(D)(ii) a substantial improvement to the purchased tangible
property is measured by the QOF’s additions to the adjusted basis of the building.
Under section 1400Z-2(d), measuring a substantial improvement to the building by
additions to the QOF’s adjusted basis of the building does not require the QOF to
separately substantially improve the land upon which the building is located.
(B) [Reserved].
(d) Qualified opportunity zone business--(1) In general. A trade or business is a
qualified opportunity zone business if-(i) Substantially all of the tangible property owned or leased by the trade or
business is qualified opportunity zone business property as defined in paragraph (d)(2)
of this section,
(ii) Pursuant to section 1400Z-2(d)(3)(A)(iii), the trade or business satisfies the
requirements of section 1397C(b)(2), (4), and (8) as defined in paragraph (d)(5) of this
section, and
(iii) Pursuant to section 1400Z-2(d)(3)(A)(iii), the trade or business is not
described in section 144(c)(6)(B) as defined in paragraph (d)(6) of this section.
(2) Qualified opportunity zone business property of the qualified opportunity zone

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business for purposes of paragraph (d)(1)(i) of this section--(i) In general. The tangible
property used in a trade or business of an entity is qualified opportunity zone business
property for purposes of paragraph (d)(1)(i) of this section if-(A) The tangible property satisfies section 1400Z-2(d)(2)(D)(i)(l);
(B) The original use of the tangible property in the qualified opportunity zone
commences with the entity or the entity substantially improves the tangible property
within the meaning of paragraph (d)(4) of this section (which defines substantial
improvement in this context); and
(C) During substantially all of the entity’s holding period for the tangible property,
substantially all of the use of the tangible property was in a qualified opportunity zone.
(ii) Substantially all of a qualified opportunity zone business’s holding period for
property described in paragraph (d)(2)(i)(C) of this section. [Reserved].
(iii) Substantially all of the usage of tangible property by a qualified opportunity
zone business in a qualified opportunity zone. [Reserved].
(3) Substantially all requirement of paragraph (d)(1)(i) of this section--(i) In
general. A trade or business of an entity is treated as satisfying the substantially all
requirement of paragraph (d)(1)(i) of this section if at least 70 percent of the tangible
property owned or leased by the trade or business is qualified opportunity zone
business property as defined in paragraph (d)(2) of this section.
(ii) Calculating percent of tangible property owned or leased in a trade or
business--(A) In general. If an entity has an applicable financial statement within the
meaning of §1.475(a)-4(h), then the value of each asset of the entity as reported on the
entity’s applicable financial statement for the relevant reporting period is used for

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determining whether a trade or business of the entity satisfies the first sentence of
paragraph (d)(3)(i) of this section (concerning whether the trade or business is a
qualified opportunity zone business).
(B) Entity without an applicable financial statement. If paragraph (d)(3)(ii)(A) of
this section does not apply to an entity and a taxpayer both holds an equity interest in
the entity and has self-certified as a QOF, then that taxpayer may value the entity’s
assets using the same methodology under paragraph (b) of this section that the
taxpayer uses for determining its own compliance with the 90-percent asset requirement
of section 1400Z-2(d)(1) (Compliance Methodology), provided that no other equity
holder in the entity is a Five-Percent Zone Taxpayer. If paragraph (d)(3)(ii)(A) of this
section does not apply to an entity and if two or more taxpayers that have self-certified
as QOFs hold equity interests in the entity and at least one of them is a Five-Percent
Zone Taxpayer, then the values of the entity’s assets may be calculated using the
Compliance Methodology that both is used by a Five-Percent Zone Taxpayer and that
produces the highest percentage of qualified opportunity zone business property for the
entity.
(C) Five Percent Zone Taxpayer. A Five-Percent Zone Taxpayer is a taxpayer
that has self-certified as a QOF and that holds stock in the entity (if it is a corporation)
representing at least 5 percent in voting rights and value or holds an interest of at least
5 percent in the profits and capital of the entity (if it is a partnership).
(iii) Example. The following example illustrates the principles of paragraph
(d)(3)(ii) of this section.
Example. Entity ZS is a corporation that has issued only one class of stock and
that conducts a trade or business. Taxpayer X holds 94% of the ZS stock, and

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Taxpayer Y holds the remaining 6% of that stock. (Thus, both X and Y are Five Percent
Zone Taxpayers within the meaning of paragraph (d)(3)(ii)(C) of this section.) ZS does
not have an applicable financial statement, and, for that reason, a determination of
whether ZS is conducting a qualified opportunity zone business may employ the
Compliance Methodology of X or Y. X and Y use different Compliance Methodologies
permitted under paragraph (d)(3)(ii) (B) of this section for purposes of satisfying the 90percent asset test of section 1400Z-2(d)(1). Under X’s Compliance Methodology (which
is based on X’s applicable financial statement), 65% of the tangible property owned or
leased by ZS’s trade or business is qualified opportunity zone business property. Under
Y’s Compliance Methodology (which is based on Y’s cost), 73% of the tangible property
owned or leased by ZS’s trade or business is qualified opportunity zone business
property. Because Y’s Compliance Methodology would produce the higher percentage
of qualified opportunity zone business property for ZS (73%), both X and Y may use Y’s
Compliance Methodology to value ZS’s owned or leased tangible property. If ZS’s trade
or business satisfies all additional requirements in section 1400Z-2(d)(3), the trade or
business is a qualified opportunity zone business. Thus, if all of the additional
requirements in section 1400Z-2(d)(

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Ad6fb980639ad3def. Public record. Not legal advice.