As discussed in the Oct. 2, 2018 column, the Tax Cuts and Jobs Act, P.L. 115-97 (Dec. 22, 2017) (Tax Act), created a new economic development vehicle with tax deferral and tax abatement (qualified opportunity zones or QOZ). QOZ provides a deferral mechanism for short- and long-term capital gains for current investments in nearly all asset classes. A QOZ provides (1) the ability to invest only the gain rather than the principal of a current investment; (2) a broad range of investments eligible for the deferral; (3) a potential basis step-up of 15 percent or substantially more of the initial deferred amount of investment; and (4) an opportunity to eliminate taxation on capital gains post-investment.

The QOZ program is designed to encourage investment in distressed communities designated as qualified opportunity zones, by providing tax incentives to invest in QOZs that, in turn, invest directly or indirectly in the opportunity zones. The enacted statutory language left many uncertainties regarding the operation of the opportunity zone program. The Proposed Regulations answer some of the most important questions, mostly with taxpayer-friendly answers. See REG-115420-18; 83 Fed. Reg. 54,279 (Oct. 29, 2018). However, important questions remain unanswered and additional proposed regulations are expected to be issued in the near future.

Summary of the Proposed Regulations