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Dinse Brief: Qualified Opportunity Zones

By Ted Lawrence


To encourage investment in low-income communities, the Tax Cut and Jobs Act created a new section of the Internal Revenue Code, 26 USC § 1400Z, that address investments made in “Qualified Opportunity Zones.”

What are Qualified Opportunity Zones?

Qualified Opportunity Zones are specific geographic areas that have been designated as such by the U.S. Treasury Department.  Earlier this year, the U.S. Treasury Secretary certified a number of Vermont towns and neighborhoods as Qualified Opportunity Zones.  The certified areas include Winooski, parts of Burlington and South Burlington, Vergennes, and Rutland.  Investing in a Qualified Opportunity Zone may provide significant tax benefits to an investor.


Investment in a Qualified Opportunity Fund provides three potential tax advantages to the investor:

  1. A deferral of tax on gains that are invested.
  2. Partial forgiveness of tax due with respect to those gains.
  3. A basis step-up on those gains.

In addition, investment in a Qualified Opportunity Fund allows investors to receive favorable tax treatment on real-estate investments without actually owning or managing the development of real property (unlike, for example, a 1031 exchange property).

Investment Process

Investment in a Qualified Opportunity Zone is made through a tiered structure.  There are three different types of entities and properties involved in the process:

  • Qualified Opportunity Zone Funds;
  • Qualified Opportunity Zone Businesses; and
  • Qualified Opportunity Zone Business Property.

Qualified Opportunity Fund

A Qualified Opportunity Fund is the umbrella entity through which all investments in the Qualified Opportunity Zone program must be made.  A Qualified Opportunity Fund must:

  • Hold at least 90 percent of its assets in “qualified opportunity zone property”—i.e., the stock or interests of a Qualified Opportunity Zone Business, or Qualified Opportunity Zone Business Property.
  • Not make investments in another Qualified Opportunity Fund.
  • Make certain tax filings.

Qualified Opportunity Zone Business

A Qualified Opportunity Zone Business is an entity that owns and operates “tangible property”—i.e., real estate or personal property—in a Qualified Opportunity Zone.  It is the entity that actually performs the development work in a Qualified Opportunity Zone.  A Qualified Opportunity Zone Business must meet the following requirements:

  • “Substantially all” of the tangible property owned by the Business must be Qualified Opportunity Zone Business Property.
  • Follow certain statutory standards detailed in other sections of the Internal Revenue Code.
  • Not function as a “sin business”—e.g., owning golf courses, liquor stores, massage or hot tub parlors, or tanning salons.

Qualified Opportunity Zone Business Property

Qualified Opportunity Zone Business property is tangible property that is:

  • Acquired by the Qualified Opportunity Fund or Business after December 31, 2017.
  • “Originally acquired” (i.e., a new investment) or “substantially improved” (i.e., becomes more highly valued) by the Qualified Opportunity Fund or Business.

Unanswered Questions

There are a number of unanswered questions regarding investments in Qualified Opportunity Zones, including:

  • Whether the deferral and forgiveness on “gains” invested in a Qualified Opportunity Fund refers to all gains or just capital
  • The meaning of “substantially improve” in the context of Qualified Opportunity Zone Business Property.
  • How the basis step-up on gains invested in a Qualified Opportunity Fund will be calculated.
  • Whether Qualified Opportunity Funds and Qualified Opportunity Zone Businesses may organize as LLCs.

The U.S. Treasury and Internal Revenue Service are likely to issue further guidelines on investing in Qualified Opportunity Zones in the near future.  We will send a further update when such guidance is issued.

Dinse Covid-19 Update

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