IRS Responds Favorably to Key Nareit Comments in Final Qualified Opportunity Zone Regulations

On Dec. 19, 2019, the IRS issued final qualified opportunity zone (QOZ) regulations. The official version of these regulations will be published in the Federal Register shortly. While we are still reviewing these regulations, we note that they favorably address a number of comments raised by Nareit in earlier submission letters.

In particular, consistent with Nareit’s Dec. 26, 2018 comment letter, its July 1, 2019 comment letter, and the requests of a number of other organizations, the final regulations define gain eligible for deferral as including any items of gross gain from depreciable real and personal property used in a trade or business (as defined in section 1231(b)), without requiring such gain to exceed section 1231 losses.

Additionally, and also consistent with general recommendations made by Nareit and similar comments made by others, the final regulations provide that the 180-day deferral period (within which gains may be deferred) for capital gain dividends of REIT shareholders generally begins at the close of the shareholder’s taxable year in which the capital gain dividend would otherwise be recognized or, if elected, on the day the capital gain dividend is paid. Further, the final regulations also confirm that otherwise qualifying “built-in gains” (e.g., former C corporation gains recognized by a REIT and subject to section 1374) are eligible for deferral under the QOZ provisions.

On the other hand, the IRS did not accept Nareit’s recommendation to modify rules for REIT earnings and profits purposes so that a REIT’s distributions of gain from the disposition of a qualifying investment (which is not taxable to the REIT due to the QOZ rules) would not result in ordinary income to the REIT’s shareholders. However, a REIT may still qualify and elect to be structured as a qualified opportunity fund (a QOF REIT) that may distribute certain capital gain dividends tax-free to its shareholders, or it may distribute capital gain dividends to its shareholders, who in turn may invest those capital gain dividends in a qualified opportunity fund.