The Treasury Department and IRS have released updated regulations providing much-needed guidance for Opportunity Zone (OZ) funds and investors. These regulations expand the types of eligible OZ projects and offer increased flexibility, including a longer period for deploying capital and beneficial rules for leased assets. One key benefit for investors is that the regulations clarify eligibility for the OZ tax exemption, which allows for the exclusion of gains on OZ fund interests held for at least 10 years.
While these updated regulations provide significant clarification and encourage investment, several uncertainties remain. These include the basis treatment for investors in OZ funds organized as partnerships and questions about reinvestment rules. Furthermore, investors and OZ funds will need to navigate differences in the tax treatment of various OZ fund structures under the new rules.