The Qualified Opportunity Zone Program has kept many
investors paralyzed in uncertainty due to regulatory confusion. In the update
below, we provide an overview of the highly sought-after guidance, which was recently
released by the Internal Revenue Service (IRS) and the US Treasury Department…
We have put together the following high-level overview of the 169-page guidance
and will explain how the new clarifications will impact investors.
First let’s recap: Opportunity
- The IRS defines eligible opportunity zone
property as QOZF stock, QOZF partnership interest, or QOZF business property.
Qualified opportunity property must exist and operate in a QOZ, be new to the
entity, and abide by specific requirements.
- The IRS states that all types of capital gains
are eligible for the Opportunity Zones tax incentives through the use of
Opportunity Funds, which invests at least ninety percent of its assets in
Qualified Opportunity Zone (QOZ) Property.
- Qualified Opportunity Zone Funds (QOZF) are
subject to specific regulations as set forth by the IRS, namely the types of
gains that may be deferred, the timeline by which the amounts by invested, and
how investors may elect to defer specified gains.
The original Opportunity Zone legislation left eager
investors with more questions then answers. Below are some of the challenges that
the guidance addresses.
- The vague term, “substantially all,” used in
various places of section 1400Z-2
- Rules surrounding transactions that trigger the
inclusion of gain that a taxpayer elected to defer under section 1400Z-2
- Unclear definitions of timing and amount of the
deferred gain that is included in the package
- The approved treatment of leased property used
by a QOZ business and use of QOZ business property in the QOZ
- Sourcing of gross income to the QOZ business
- Another vague term, “reasonable period,” for a
QOF to reinvest proceeds from the sale of qualifying assets without paying a
Below are a few of the key clarifications giving investors
the confidence to move forward:
- For use of the property, at least 70 percent of
the property must be used in a QOZ.
- For the holding period of the property, tangible
property must be QOZ business property for at least 90 percent of the QOF’s or
QOZ business’s holding period.
- The partnership or corporation must be a QOZ
business for at least 90 percent of the QOF’s holding period.
- Eligible business criteria expand from revenue
generation to service transactions and employee location.
The IRS also provided several situations where deferred
gains may become taxable. If an investor transfers their interest in a QOF,
e.g., if the transfer is done by gift, the deferred gain may become taxable.
However, inheritance by a surviving spouse is not a taxable transfer, nor is a
transfer, upon death, of an ownership interest in a QOF to an estate or a
revocable trust that becomes irrevocable upon death.
We encourage you to read
the update in its entirety as it includes additional guidance on the
term “original use,” and addresses all the issues mentioned above. If you are
still hesitant about moving forward with this investment opportunity, the
professionals in our office can help provide clarity, address your concerns and
answer any specific questions you may have.