Qualified Opportunity Zones: An Overview

Prepared by the Staff of the Joint Committee on Taxation

June 2019
Stock or 

Partnership 

interest

Overview

2

Investor

Qualified 

Opportunity Fund

Qualified 

Property

Qualified Business 

• Only capital gains

• Timing – 180 days

• Rollover gain deferral and reduction

• Post-acquisition gain exclusion 

• Geography

• Corp or P/S invests in QOZ property

• 90% of assets are QOZ property

• Mixed funds

• Tangible property

• Acquired by purchase

• New or substantially improved

• Used in QOZ 

• 70% qualified property

• 50% or > of total income in QOZ

• 40% of intangibles used in business

• Not too much cash/securities

• No sin businesses

Cash or

property
Investor 3
Investor: Requirements

 Investors (any individual or entity) receive tax benefits by making an 

equity investment in a Qualified Opportunity Fund (QOF) which will 

invest in areas designated as Qualified Opportunity Zones (QOZs)

 Any gain treated as a capital gain (including net 1231 gain) 

generated from a sale with an unrelated party qualifies

 Only the gain amount needs to be invested, not all proceeds and not all the gain. If 

you invest all your proceeds, you will have a mixed fund and some portion will not 

be eligible for benefits

 Investors have 180 days from the sale or exchange in which to invest 

the gain in a QOF

 If the gain flows through from partnership, S corporation, RIC, or REIT, the 

partner/shareholder generally has 180 days from the end of the entity’s 

tax year (i.e., Dec. 31 to the following June 28)

 Taxpayer files Form 8949 for year taxpayer elects to defer gain

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Investor: Tax Benefits

 Taxpayer may reinvest gain from the sale of property (“rollover 

gain”) by acquiring an interest in a QOF and be eligible for the 

following

 (1) Deferral of tax on rollover gain and

 (2) Partial exclusion of rollover gain

 (3) The permanent exclusion of post-acquisition gains

 Taxpayer makes two elections, one for the rollover gain benefits and 

one for the exclusion benefits

 The benefits are tied to the period in which Taxpayer holds the QOF 

investment

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Investor: Tax Benefits

 Tax on capital gains realization can create a “lock-in effect” where 

taxpayers hold assets too long to defer paying tax

 The deferral and partial exclusion of tax on rollover gain reduces 

the lock-in effect for existing investments

 Taxpayers have an incentive to sell and invest in a QOZ in order to 

receive tax benefits

 Instead of paying tax today, taxpayer pays in 2027 when filing 

2026 return

 Taxpayer’s rollover gain is recognized the earlier of (i) the date 

in which the QOF interest is sold or (ii) the taxable year that 

includes December 31, 2026

 The tax benefits create a lock-in effect with respect to the QOZ 

investment

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Investor: Tax Benefits

 Partial exclusion of tax on gain

 Taxpayer’s initial basis in investment is $0

 If Taxpayer holds investment for at least five years, Taxpayer’s 

basis is increased by an amount equal to

10% of the rollover gain

 If taxpayer holds investment for at least seven years (i.e., an 

additional two years), taxpayer’s basis is increased by an amount 

equal to 5% of the rollover gain, for a total basis increase to 

15% of the amount of rollover gain

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Investor: Tax Benefits

8

After 5 

years, basis 

is increased 

by 10% of 

the rollover 

gain

After 7 years, 

basis is 

increased by 

an additional 

5% of the 

rollover gain

At time of sale or exchange or 

taxable year that includes 

December 31, 2026, remaining 

rollover gain is recognized and 

tax is paid. If investment has 

lost value, gain is computed 

using fair market value

Basis starts 

at zero

Rollover gain amount

B

A

S

I

S

ZERO BASIS

10% Basis 15% Basis
Investor

 The proposed regulations provide a nonexclusive list of 11 

“inclusion events” that cause the inclusion of the deferred gain, 

including: 

 A taxable disposition of all or a part of the QOF investment

 Certain transfers of interests in entities that own QOF interests

 A transfer of a QOF interest by gift

 Certain events do not cause the inclusion of the deferred gain.

 A transfer to the beneficiary of an estate is not an inclusion event

 A QOF selling its underlying assets is not an inclusion event 

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Investor: Tax Benefits

 Exclusion of post-acquisition appreciation

 If taxpayer holds investment for at least 10 years, taxpayer may 

elect, at the time of sale or exchange of investment, to increase 

basis of investment to fair market value at the time of sale or 

exchange

 At this time, taxpayer has already paid tax on rollover gain.

 This has the effect of excluding additional gain of investment 

from tax

 Taxpayer does not have to make election if investment has 

declined in value

 The proposed regulations allow for taxpayers to make this 

election up until December 31, 2047

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Investor: Example

11

6/30/2019: Taxpayer has a basis in XYZ stock of $40 and sells stock for 

$140, realizing $100 of gain 

Taxpayer reinvests $100 gain in a QOF

Taxpayer does not have to pay tax on gain and Taxpayer’s 

initial basis in QOF investment is $0

6/30/2024: Taxpayer has held QOF investment at least 5 years so 

Taxpayer’s basis in investment is increased to $10

6/30/2026: Taxpayer has held QOF investment at least 7 years so 

Taxpayer’s basis is increased an additional $5 to $15

12/31/2026: Taxpayer recognizes $85 of gain ($100 less $15) 

This is true even though Taxpayer has not sold the QOF 

investment. Taxpayer’s basis in investment is now $100

7/1/2029: Taxpayer has held QOF investment for at least 10 years. 

Taxpayer sells QOF investment for $219 and pays no 

additional tax
 Assume

 Investor has $100 rollover gain in 2019

 Capital gains taxed on realization at 20.0%

 Interest rate is 2.5%

 Inflation is 2.0%

 If investor chooses non-QOZ investment with a rate of return of 9.0%

 Pays $20 in tax on $100 rollover gain in 2019

 $80 asset grows to $231 in 2029

 Pays $30 in tax on $151 post-acquisition gain in 2029

 Has $201 in 2029

 A QOZ investment with a rate of return of 6.0% gives the same after tax 

return

 Pays $0 in tax on $100 rollover gain in 2019

 Pays $17 in tax on $85 rollover gain in 2026

 Pays $1 in interest to borrow $17 from 2026 to 2029

 $100 asset grows to $219 in 2029

 Pays $0 in tax on $119 post-acquisition gain in 2029

 Has $201 in 2029

Investor: Example

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13 Qualified Opportunity Fund
Qualified Opportunity Fund: Geography

 A QOF is an entity formed for the purpose of investing in QOZ 

property, which is property located in a QOZ

 Census tracts in every State that are “low-income communities” 

(determined based on the income of residents) were eligible for 

QOZ nomination and designation. Certain contiguous tracts were 

also eligible

 QOZs were nominated by the applicable State governor and 

designated by the Secretary of Treasury

 The number of QOZs was generally limited to 25% of the total 

number of low-income communities in the State (100% for Puerto 

Rico)

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Qualified Opportunity Fund: Geography

 This nomination and designation process has ended and there is no 

process to designate additional zones

 There are currently 8,764 designated QOZs

 The designations expire at the end of 2028. But the important 

things are

 Investments can only be made with respect to a sale or exchange before 

January 1, 2027

 The expiration of the designation will not affect the availability of the tax 

exclusion benefit for existing investments

 The proposed regulations allow for taxpayers to make this election for the 

tax exclusion benefit up until December 31, 2047

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Qualified Opportunity Fund: Geography

16
Qualified Opportunity Fund: Geography

17

139

879

86

28

61

168

46

25

126

63

25

25

117

628

25

74

44

85

161

62

128

150

288

327

120

100

156

158 260

427

320

176

144

252

135

514

32

55

212

300

27

25

138

72

169

25

25

25

149

DC 25

25

PR 863

Other possessions: Guam (25), American Samoa (16), Northern Marianas (20), U.S. Virgin Islands (14)
Qualified Opportunity Fund: Geography

 Census tracts are uniquely numbered statistical subdivisions of 

each county in the United States 

 Census tracts average about 4,000 inhabitants each.

 Minimum population – 1,200

 Maximum population – 8,000

 Census tracts are semi-permanent, but can be merged, split, or 

reconfigured with each decennial census

 Because census tracts are based on population, some are 

geographically large while others are small

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Qualified Opportunity Fund: Geography

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Qualified Opportunity Fund

 A QOF must be either a corporation (including a RIC or REIT) 

or a partnership

 QOFs must have 90% of its assets invested in QOZ property

 Test is measured by the average taken at 6 months from the 

start of the taxable year and the end of the taxable year.

 There are penalties for failure to comply

 Penalty equals the shortfall multiplied by the Federal shortterm rate + the underpayment rate)

 Taxpayer can show reasonable cause

 There is no application or approval process for an entity to 

become a QOF. Instead, an entity simply elects QOF status.

 QOFs must file Form 8996 with their annual income tax return, 

certifying QOF status

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Qualified Opportunity Fund: Form 8996

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Qualified Opportunity Fund:

90% Requirement

 QOZ property is either

 Qualified opportunity zone business property (“qualified 

property”)

 One of two types of entity interests in entities that own 

qualified property

 Qualified opportunity zone stock

 Qualified opportunity zone partnership interests

 Generally, qualified property is new or substantially 

improved tangible property

 This has led practitioners to describe two types of 

structures, the “one tier” structure and the “two tier” 

structure. A QOF could have different structures for 

different investments

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Qualified Opportunity Fund:

90% Requirement

 New capital investments in the QOF (i.e., contributions 

received in the prior six months) will not be included in 

the semi-annual testing

 Proceeds from sales of the QOF’s underlying QOZ 

property will not result in penalties if reinvested in new 

QOZ property within a year

 The new investments and sales proceeds must be kept 

as cash, cash equivalents or debt instruments with a 

term of 18 months or less

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Qualified Opportunity Fund: Mixed Fund

 In the case of any investment in a QOF only a portion 

of which consists of investments of gain to which an 

election is in effect, such investment is treated as two 

separate investments (a mixed fund). Tax benefits are 

available only with respect to the investment for which 

an election is in effect

 For example, if a taxpayer rollovers the entire proceeds 

from the sale of an appreciated asset, rather than just the 

gain, the excess will be treated as a separate investment in 

the QOF and will not be eligible for tax benefits

 If property with a fair market value in excess of basis is 

contributed to a QOF, the amount in excess of basis is 

treated as a separate investment

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Qualified Opportunity Fund: Mixed Fund

25

benefitsQOZ 

benefitsNo QOZ 

Investor has capital gains 

but chooses to contribute 

a partially depreciated 

asset instead.

Mixed Opportunity Zone Fund
Qualified Opportunity Fund: Structure

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One Tier Two Tier

Qualified Opportunity Fund

(partnership or corporation)

Taxpayer 1 Taxpayer 2

Qualified Property

90% Requirement

Qualified Opportunity Fund

(partnership or corporation)

Taxpayer 1 Taxpayer 2

Qualified Business

(partnership or corporation)

90% Requirement

• 50% or greater of total income in QOZ

• 40% of intangibles used in business

• Not too much cash/securities

• No sin businesses

Qualified Property
27 Qualified Business
Qualified Business

 The entity interest must be acquired by the Taxpayer 

from the entity, solely for cash, after December 31, 

2017

 The entity must be a qualified business at the time of 

acquisition or, if the entity is new, the entity must be 

organized to be a qualified business

 The entity must qualify as a qualified business during 

substantially all (90%) of the qualified opportunity 

fund’s holding period of the entity interest

 The entity must be domestic

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Qualified Business

 A qualified business must be a trade or business

 The activities of the business must comprise the active 

conduct of a trade or business

 The ownership and operation (including leasing) of real 

property is the active conduct of a trade or business 

 However, merely entering into a triple-net lease with 

respect to real property owned by a taxpayer is not 

the active conduct of a trade or business

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Qualified Business

 A qualified business is a trade or business that satisfies 

the substantially all requirement, which requires 

substantially all of the underlying value of the tangible 

property owned or leased by the business to be 

qualified property

 For this purposes, substantially all means “at least 70%”

 A qualified business must also satisfy four additional 

requirements

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Qualified Business

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90% Requirement Substantially All (70%) Requirement

 Applies in “one tier” and 

“two tier” structures

 Looks to all assets of QOF.

 May be a 63% test (90% * 

70%) in a “two tier” 

structure

 Applies only in “two tier” 

structure

 Looks to tangible property 

of qualified business. 

Other assets are excluded 

from test

 Qualified business must 

also satisfy additional 

requirements which do not 

apply in “one tier” structure 
Qualified Business

 The first requirement: At least 50% of the total gross 

income of the qualified business must be derived from 

the active conduct of business in the QOZ

 Three safe-harbors are available to meet this test. If 

unable to meet any of the three, a QOZB may still 

satisfy this rule based on facts and circumstances 

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Key: = service provider

Qualified Business: 

Sufficient QOZ Activity Safe Harbor

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Opportunity Zone

First safe harbor: At least 50% of services performed (based on hours) in the QOZ by 

employees and contractors
Qualified Business: 

Sufficient QOZ Activity Safe Harbor

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Opportunity Zone

Second safe harbor: At least 50% of amounts paid are for services performed in the QOZ

$ $ $

$ $ $

$ $ $

$ $ $

Key: = service provider

$= income from services 

performed in the QOZ
Qualified Business: 

Sufficient QOZ Activity Safe Harbor

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Opportunity Zone

Third safe harbor: Tangible property and operational functions combine to generate 50% of 

gross income

Key: = service provider

= manager

= tangible property
Qualified Business

 The second requirement: A substantial portion (40%) of 

the qualified business’s intangible property must be 

used in the active conduct of business in the QOZ

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Qualified Business

 The third requirement: Less than 5% of the average of 

the aggregate unadjusted bases of the property of the 

business is attributable to nonqualified financial 

property

 Nonqualified financial property includes securities, 

debt, and certain financial instruments 

 A reasonable amount of working capital is allowed

 The proposed regulations have a 31-month safe harbor 

for working capital for all businesses, including real 

estate projects. It can be extended if a written plan is 

not completed due to government delays

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Qualified Business

 The fourth requirement: The business cannot be a golf 

course, country club, massage parlor, hot tub or suntan 

facility, racetrack or other facility used for gambling, or 

store whose principal business is the sale of alcoholic 

beverages for consumption off premises

 This is the longstanding private activity bond blacklist

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39 Qualified Property
Qualified Property 

 Qualified property consists of tangible property used in 

the trade or business of a QOF or qualified business 

that satisfies the following

 The property must be acquired by purchase from an 

unrelated individual after December 31, 2017

 The original use of the property in the QOZ must begin 

with the QOF or qualified business, or the QOF or 

qualified business must substantially improve the 

property

 Substantially all (70%) of the use of the property must 

be in the QOZ during substantially all (90%) of the 

QOF’s holding period

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Qualified Property

 To qualify the property must be either originally used in 

a QOZ or substantially improved 

 Original use generally commences when the property is 

first placed in service within the QOZ for purposes of 

depreciation. So, existing structures being depreciated 

will not qualify 

 There is exception for buildings that have been vacant 

for at least five years

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Qualified Property

 Substantial improvement must occur within a 30-month 

period 

 Doubling the basis of the property over any 30-month 

period after the property is acquired would count as 

substantial improvement

 Each asset must be substantially improved to qualify as 

qualified property. Assets cannot be aggregated

 Land:

 Land cannot be original use property

 The proposed regulations provide that land in a QOZ must be 

used in a trade or business but does not need to be substantially 

improved to be qualified property. Anti-abuse rules can be 

applied where land is acquired without a legitimate business 

purpose

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Qualified Property: Leased Property

 Under the “two-tier” structure, leased property must be qualified 

property

 Leased property is qualified business property so long as: 

 the leased property is acquired under a lease entered into after 

December 31, 2017

 substantially all of the use of the leased property is in a QOZ for 

substantially all of the period for which the business leases the property

 the lease is a “market rate lease”

 So, QOFs can lease tribal government lands. There may be future 

guidance issued 

 Like land, leased property need not be substantially improved, nor 

does its original use need to commence with the lessee

 Unlike purchased tangible property, lessor and lessee can be 

related parties if certain conditions are met

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44 Comparisons and Additional Resources
Comparisons

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New Market Tax Credit Like-Kind Exchanges

 Section 45D provides tax credits 

for taxpayers who invest in low- income communities

 Similar to the QOZ rules, 

taxpayers must invest through 

entities

 Credit is limited to amounts 

allocated to investment through 

application process

 Investors without allocations get 

no benefits

 No new allocations after 2019

 Section 1031 provides taxpayers 

who sell property and reinvest in 

like-kind property with deferral 

of tax on gain

 In contrast to the QOZ rules, 

taxpayers must directly acquire 

replacement property

 The 2017 Tax Act limited the 

applicability of Section 1031
Comparisons

 QOZ tax benefits can be combined with other tax benefits for the 

same investment. There are no rules preventing double dipping.

 For example, taxpayers can use the new markets tax credit in a 

QOZ. Taxpayer can create a QOF, have that QOF qualify as a 

qualified community development entity (“CDE”) and apply for an 

allocation from the Treasury. If the combined QOF/CDE is awarded 

an allocation, the entity could make an equity investment in a QOZB 

and receive both benefits

 Other examples of benefits that can be used in the QOZ include:

 Low-income housing tax credit

 Rehabilitation tax credit

 Like-kind exchange provisions 

 Renewable electricity production tax credit

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Additional Resources

 CDFI Fund has a map showing qualified opportunity zones, available at 

https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

 Notice 2018-48 (listing the qualified opportunity zones), available at 

https://www.irs.gov/pub/irs-drop/n-18-48.pdf

 Rev. Rul. 2018-29 (measuring substantial improvement), available at 

https://www.irs.gov/pub/irs-drop/rr-18-29.pdf

 First set of proposed regulations, available at 

https://www.govinfo.gov/content/pkg/FR-2018-10-29/pdf/2018-

23382.pdf

 Second set of proposed regulations, available at 

https://www.govinfo.gov/content/pkg/FR-2019-05-01/pdf/2019-

08075.pdf

 Request for information (reporting), available at 

https://www.irs.gov/pub/irs-drop/reg-120186-18.pdf

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