The Treasury Department and the Internal Revenue Service (IRS) issued proposed regulations and other published guidance for the new Opportunity Zone tax incentive.
The Qualified Opportunity Zones (QOZ) was created by the 2017 Tax Cuts and Jobs Act to attract investments in low-income communities. 8,761 communities in all 50 states, the District of Columbia and five U.S. territories were designated as qualified Opportunity Zones for ten years.
A taxpayer who invests capital gain from an actual, or deemed, sale or exchange into a (Qualified Opportunity Fund) QOF can defer the payment of tax on the gain until 2026. A QOF is any corporation or partnership organized to invest at least 90% of its assets in QOZ Property.
The proposed regulations emphasize that all capital gains qualify for deferral. However, the gain must arise from the sale to, or exchange with, an unrelated person of any property held by the taxpayer. In the case of a capital gain experienced by a partnership, the rules allow either a partnership or its partners to elect deferral. Similar rules apply to other pass-through entities, such as S corporations and their shareholders, and estates and trusts and their beneficiaries.
The IRS and Treasury also clarify the QOF. QOF must hold at least 90 percent of its assets in qualified Opportunity Zone property (investment standard). Taxpayers who hold their QOF investment for at least ten years may qualify to increase the basis of the investment to the fair market value of the investment on the date it sells or exchanges.
Further, the proposed regulations explain that the first day of the 180-day period is the date on which the gain would be recognized for federal income tax purposes. This period is essential where special provisions within the Internal Revenue Code specify a deemed date on the date of sale or exchange. Thus, for eligible gains from a partnership, the 180-day period generally begins on the last day of the partnership’s taxable year, but the partner may elect to use the partnership’s 180-day period.
Apart from the proposed regulations, Treasury and the IRS also released additional guidance, Rev. Rul. 2018-29 and form 8996, to aid taxpayers in participating in the qualified Opportunity Zone incentive.