On April 17, 2019, the U.S. Department of Treasury issued the second round of proposed regulations to clarify the rules related to the Qualified Opportunity Zones (QOZs). These proposed regulations refine the application of Section 1400Z-2 of the Internal Revenue Code (the Code) and update the proposed regulations previously issued in October 2018. The proposed regulations:

1. Define the term "substantially all" for purposes the qualifying amount of property to be held by a Qualified Opportunity Zone Business (QOZB) and qualifying holding periods;

2. Describe the transactions that prematurely trigger gain recognition otherwise deferred by investment in QOZs;

3. Explain how to determine both the timing and amount of deferred gain to be recognized; and

4. Address how leased property used by a QOZB will be treated.

 The following is a summary of some of the new rules found in the proposed regulations.

The definition of "substantially all" is still 70 percent for determining use of tangible property but is 90 percent for holding periods.

To qualify as a QOZB under the Code, "substantially all" of the tangible property owned or leased by the trade or business must be QOZ business property, as that term is defined in the Code. The October 2018 proposed regulations clarified that, for purposes of determining whether a partnership or corporation whose equity interests were owned by a Qualified Opportunity Fund (QOF) was a QOZB, the term "substantially all" meant at least 70 percent.

This was helpful but did not address the other uses of the phrase "substantially all" found in Section 1400Z-2. In particular, the definition of QOZ business property utilized this term twice, once to describe the amount of the property's use by a QOF that must occur in a QOZ and once to describe the period of time over which the QOF must hold the property. As stated above, the October 2018 regulations provided guidance on the former but not the latter. There are more occasions when the term "substantially all" describes a holding period.

These new proposed regulations now confirm that the term "substantially all" still means 70 percent in the contexts related to use but a 90 percent threshold is imposed in the holding period context. In other words, to qualify as QOZ business property, 70 percent of the property's use by the QOF must occur in a QOZ and this qualifying use must occur during 90 percent of the QOF's holding period for such property.