The IRS and Treasury issued its much anticipated second set of proposed regulations related to Qualified Opportunity Funds (QOFs). The proposed regulations addresses the gains that may be deferred as a result of a taxpayer's investment in a QOF, the treatment of tangible leased property, Section 1231 gain, the 90-percent asset test, and more. The guidance is generally taxpayer-friendly and provides the flexibility that businesses and investors were seeking. Treasury also released a document soliciting public input on how best to collect public information to track and measure the economic activity in opportunity zones.
Qualified Opportunity Zone Basics
The TCJA now allows the designation of certain low-income community population census tracts as Qualified Opportunity (QO) Zones eligible for a number of favorable tax rules aimed at encouraging economic growth and investment in businesses within the zones. There are currently more than 8,700 communities in all 50 states, the District of Columbia and five U.S. territories that have been designated as QO Zones. They will retain those designations until December 31, 2028.
Investors can form private investment vehicles, known as qualified opportunity funds (QOFs), for funding development and redevelopment projects in the zones. The tax code provides temporary deferral of inclusion in gross income for capital gains reinvested in a QOF and the permanent exclusion of capital gains from the sale or exchange of an investment in the QOF.
In general, a QOF is an investment vehicle: 1) that's organized as a corporation or a partnership for the purpose of investing in QO Zone property (other than another QOF) and 2) that holds at least 90% of its assets in QO Zone property.
Below are the highlights of the proposed regulations:
Conclusion
These proposed regulations are subject to further revisions based on comments received by the Treasury during the comment period. However, the Treasury has stated that taxpayers may rely upon many of these proposed rules, providing that the taxpayer applies the rules in their entirety and in a consistent manner.
Treasury and the IRS announced that they expect to address the administrative rules under Section 1400Z-2(f) applicable to a QOF that fails to maintain the required 90-percent investment standard, as well as information-reporting requirements for an eligible taxpayer under Section 1400Z-2 in separate regulations, forms, or publications. Further, Treasury and the IRS anticipate revising Form 8996. While the proposed regulations did not answer every question, it is clear from the guidance that the government is trying to incentivize investment in QOZs by easing the tests and providing flexibility to investors.
If you have any questions about how you can take advantages of these Qualified Opportunity Zone, contact us.