• Opportunity Zones (OZs) were created under the Federal Tax Cuts
and Jobs Act of 2017.
• In June 2018, the U.S. Internal Revenue Service (IRS) certified 8,762
low-income census tracts as Opportunity Zones. These census tracts
were nominated by the governors of each state.
• The Opportunity Zones program allows people and corporations with
capital gains tax liability to invest those capital gains in Opportunity
• Opportunity Funds (OFs) invest in real estate development,
businesses, and business assets in an Opportunity Zone-designated
census tract. These funds are designed to produce long-term capital
investment in distressed and underserved community areas.
• Purpose of the OZ tax incentive is to drive new businesses and
development in distressed areas.
Opportunity Zones and Qualified
Investors in Opportunity Funds can realize the following benefits:
– Temporary Tax Deferral for Investments of Fewer than 5 Years:
Funds invested in an Opportunity Fund for up to five years will have
capital gains tax liability deferred until the Opportunity Fund
investment is sold or exchanged.
– Tax Reductions for Investments of 5-10 years: Opportunity Funds
invested for 5-7 years in an Opportunity Zone have the basis of the
investment stepped up 10% (which reduces tax on 10% of the
investment). Opportunity Funds invested for 7-10 years in an
Opportunity Zone receive an additional 5% step-up in basis (and
reduction in taxable funds), which means that funds invested for at
least seven years can receive reductions in original capital gains tax
liability by 15%.
– Tax Exclusion for Gains on Investment Held At Least 10 Years:
Funds invested in an Opportunity Zone for at least 10 years receive a
permanent exclusion of any tax liability for capital gains that occur
after the Opportunity Fund investment was first made.
U.S. Environmental Protection Agency 3
Using Opportunity Funds for
• Qualified Opportunity Funds (QFOs) may encourage private
investment in brownfields revitalization in Opportunity Zones.
• IRS draft guidelines (issued Oct 2018) created uncertainty
regarding treatment of brownfield sites.
• OBLR requested clarifications on issues in comments to IRS
– Brownfields should meet “Original Use” test
– Property vacant/underutilized ≥1 year should meet “Original Use”
– Land remediation activities should meet “Substantial
– Permit gains from land improvements to carry over
– Allow brownfields investments in QOZs to be stacked
– Treat foreclosed and tax-reverted properties as “underutilized or
IRS’s second proposed rule
EPA’s understanding of the second IRS draft clarifies
that brownfields assessment/cleanup can be QOF-
eligible site prep predevelopment costs if tied to vertical
Assessing and remediating properties without undertaking
vertical development for an income-producing use will not
be an eligible QOF investment.
• Land must be used in the active conduct of a trade or
business to qualify as QOZ Property
Land held for investment purposes or for future sale is not
considered active conduct of a trade or business.
IRS’s second proposed rule
EPA’s understanding of the second IRS draft clarifies which
OZ property “test” – original use or substantial improvement
– will be relevant:
Property purchased after
Bare land (including land purchased
with buildings to be demolished for new
Land with buildings vacant < 5 years X
Land with buildings vacant > 5 years X
Other Issues addressed (or not)
in IRS second proposed rule
• Gains from QOF investments in brownfields
improvements to land should be permitted to be
carried over into other QOZ investments
• The IRS should allow QOF investments to be stacked
for brownfields properties to require remediation
Separate 30-month windows for substantial
improvements to land and vertical development
• Foreclosed and tax-reverted properties held by local
governments should be treated as “Underutilized or
U.S. Environmental Protection Agency 7
within 12 mo
A few take-aways:
• Growing market interest in OZ properties may enhance the value
of a brownfield site without planned vertical development, enough
to make assessment/remediation feasible despite the inability of
the purchaser to access QOF tax advantages
• QOF investment in “flipping” brownfields for resale is not eligible
for tax advantages
• Remember - communities retain the power to control the local
development that occurs in OZs!
o City approval still required for projects
- Create & align local plans; apply zoning rules
- judicious approval of development incentives
o Consider how community benefit agreements or inclusionary
practices can help address concerns of possible displacement
U.S. Environmental Protection Agency 11
Can add something in here on
the 31-mo working capital safe
harbor, but I don’t think that is