Opportunity Zone Magazine Opportunity Zone Magazine Volume 1, Issue 1 | Page 74

72 OPPORTUNITY ZONE MAGAZINE | VOLUME 1 • ISSUE 1 Dissecting Opportunity Zone Fund Structures By Vikram Agarwal If you are an investor, developer, fund or another industry participant, it is crucial that you understand the clarifications and practical impacts of the proposed Opportunity Zone regulations. T he IRS issued its first round of proposed regulations on Oct. 19, 2018, which described and clarified the requirements that taxpayers must meet to defer the recognition of gains by investing in a qualified opportunity fund (QOF). The regulations under Section 1400Z-2 of the Internal Revenue Code were added by the Tax Cuts and Jobs Act. These proposed regulations cover some of the questions that have arisen in the course of practitioners trying to understand and structure transactions that qualify for the benefits offered by investments in opportunity zones. PRACTICAL IMPACTS: INVESTORS The proposed regulations expressly state that only capital gains are eligible for investment in a QOF. Gains such as depreciation recapture are not eligible, while certain Section 1231 gains are likely to be eligible. It is important to understand that all types of capital gains are eligible for investment in a QOF and the rate corresponding to the type of capital gain will remain throughout the lifecycle of the QOF investment. For example, an investor may invest short- term capital gains into a QOF, and the generally higher rate of the short-term capital gain will apply when the initial deferral period is over. The proposed regulations also defined who the taxpayers are that may invest in a QOF. Essentially, individuals, C corporations (including regulated investment companies and real estate investment trusts), partnerships, and certain other pass-through entities may invest in a QOF. The proposed regulations provided for special timing rules for when the investment must be made that apply to pass-throughs such OPPORTUNITYZONEEXPO.COM