On April 17, 2019, the IRS issued proposed regulations providing additional guidance about investments in qualified opportunity zones. Comments to the proposed regulation are due within 60 days after the date the proposed rules are published in the federal register.
These regulations relate to the Tax Cuts and Jobs Act (TCJA), enacted in December 2017. Under the TCJA and implementing IRS regulations, investors are generally allowed to defer all or part of a gain that is invested into a Qualified Opportunity Fund (“QOF”) that would otherwise be includible in income. QOF are entities formed to invest in qualified opportunity zone business property. Qualified opportunity zone business property is a tangible property used in a trade or business of the QOF, if the property was purchased after Dec. 31, 2017. The gain is deferred until the investment is sold or exchanged or Dec. 31, 2026, whichever is earlier. If the investment is held for at least 10 years, investors may be able to permanently exclude gain from the sale or exchange of an investment in a QOF.
The proposed guidance permits a qualified opportunity zone business property under a market rate lease to qualify as “qualified opportunity zone business property” if during substantially all of the holding period of the property, substantially all of the use of the property was in a qualified opportunity zone. However, the proposed guidance also contain limitations and requirements on such property being considered a “qualified opportunity zone business property”, if the QOF and landlord are related persons.
A key part of the newly released guidance clarifies the ”substantially all” requirements for the holding period and use of the tangible business property, as follows:
- For use of the property, at least 70 percent of the property must be used in a qualified opportunity zone.
- For the holding period of the property, tangible property must be qualified opportunity zone business property for at least 90 percent of the QOF’s holding period.
- The QOF entity must be a qualified opportunity zone business for at least 90 percent of the QOF’s holding period.
The proposed guidance also notes that there are situations where deferred gains may become taxable if an investor transfers their interest in a QOF. For example, 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.
If you have questions regarding these proposed rules or questions concerning qualified opportunity zone investment and entity formation, please reach out to Solomon Maman.
Author
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Solomon has nearly two decades of experience representing financial institutions, real estate investors and privately owned business entities. Solomon concentrates his practice in the areas of banking, consumer financial services, real estate, business law and related litigation and appellate practice.
