A new tax incentive intended to stimulate investment in low-income communities known as opportunity zones has attracted significant attention from investors, developers and business owners since its enactment under Section 1400Z-2 of the Internal Revenue Code.

However, the specifics of the program were not initially articulated, causing investors and fund managers to wait on the sidelines until the Treasury Department released additional guidance. Some guidance was released last fall. Recently, a second set of guidance was released to provide clarity on the program and to encourage investors to move forward and take advantage of the tax benefits available to investors in qualified opportunity funds (QOFs).


QOFs are funds that primarily invest in projects or businesses located in opportunity zones. Under this tax incentive program, taxpayers may defer recognizing capital gains if, within 180 days of when such gains would otherwise be recognized, they invest in a QOF. The deferred gain is eventually included in income upon the occurrence of an inclusion event, or on Dec. 31, 2026, whichever is earlier. At that time, the investor pays tax on the lesser of (1) the deferred capital gain or (2) the fair market value of the QOF investment, less its tax basis.

Thus, if an investment in a QOF has declined in value, the investor is only required to pay tax on the current gain inherent in the QOF investment. An inclusion event is generally a sale or gift of the QOF interest, or any event that reduces the investor’s equity interest in the QOF.

However, transfers of QOF interests upon death are not typically treated as inclusion events. Basis initially equals zero, but after five years, it increases by 10% of the capital gain deferred, and after seven years, it increases another 5%. After 10 years, the tax basis in the qualified opportunity fund investment equals its fair market value on the date it is sold. Thus, in addition to providing for tax deferral, this program potentially allows taxpayers to permanently exclude up to 15% of capital gains invested in a QOF and any post-acquisition appreciation of the fund investment.


QOFs can invest in qualified opportunity zone business property, which is property that is either originally used in an opportunity zone or is substantially improved, or in qualified opportunity zone businesses. Many types of businesses that own property or operate in opportunity zones are suitable to be qualified opportunity zone businesses.

However, certain “sin” business and those that solely engage in triple net leasing of rental real estate are excluded from the program. Prior to the issuance of the most recent guidance, much discussion was had about the specific requirement that requires a business to derive at least 50% of its gross income from the active conduct of a trade or business in the opportunity zone. The new guidance provides three safe harbors to guide businesses in this respect that focus on where services and management or operational functions are performed.


The opportunity zone tax incentive is not a stand-alone program. Rather, opportunities exist to combine this program with other economic development incentives, such as low-income housing programs, the new markets and investment tax credit programs, and low-cost loans offered by various state and local agencies.

Earlier this year, the White House Opportunity and Revitalization Council, consisting of various federal agencies and chaired by the secretary of Housing and Urban Development, was formed to engage all levels of government to identify best practices and assist leaders, investors, and entrepreneurs in utilizing the opportunity zone incentive to revitalize low-income communities. In addition, local governments and urban institutions within opportunity zones have begun taking action to ensure these types of investments spur growth that positively transforms these communities.


If successful, this tax incentive will match investment capital to market opportunities in low-income communities and ensure that economic growth benefits people who live or work in these disadvantaged areas. But how will the success or failure of this program be measured? The answer is not entirely clear. There is very limited information required to be provided by QOFs to the government or the public.

Consequently, along with issuing this most recent guidance regarding the terms of the program, the Treasury Department issued a public notice seeking public comment as to what data would be useful for tracking the effectiveness of the program in bringing economic development and job creation to distressed communities. The Treasury Department seeks feedback on several questions, including what data and other information should be collected, how to measure whether the opportunity zones incentive plays a role in investment, and more.

Comments about this information collection should be received by the Treasury Department by May 31.

Julie Treppa is a tax partner and Lysondra Ludwig is a tax associate in Farella Braun + Martel’s San Francisco office.