Opportunity Zone Magazine Opportunity Zone Magazine Volume 1, Issue 1 | Page 74
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OPPORTUNITY ZONE MAGAZINE | VOLUME 1
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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
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