The IRS issued more proposed regulations (REG-120186-18) on Sec. 1400Z-2, a new provision added by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, that establishes qualified opportunity funds (QOFs) to encourage investments in low-income communities. Sec. 1400Z-2 offers three federal income tax incentives to a taxpayer who invests in a business located within a qualified opportunity zone (QOZ): (1) the temporary deferral of capital gains, to the extent the gains are reinvested into a QOF; (2) the partial exclusion of previously deferred gains when certain holding period requirements in a QOF are met; and (3) the permanent exclusion of post-acquisition gains from the sale of an investment in a QOF held longer than 10 years.
In October 2018, the IRS issued proposed regulations (REG-115420-18), but those regulations reserved the definition of “substantially all,” which is relevant for the holding period requirement and the use of the tangible business property. In the new proposed regulations governing the use of the property, at least 70% of the property must be used in a QOZ. For the holding period of the property, tangible property must be qualified opportunity zone business (QOZB) property for at least 90% of the QOF’s or QOZB’s holding period. And third, the partnership or corporation must be a QOZB for at least 90% of the QOF’s holding period.
The new proposed regulations also address transactions that may trigger the inclusion of gain that a taxpayer has elected to defer under Sec. 1400Z-2; the timing and amount of that deferred gain; the treatment of leased property used by a QOZB; the use of QOZB property in the QOZ; the sourcing of gross income to the QOZB; and what is a reasonable period for a QOF to reinvest proceeds from the sale of qualifying assets without paying a penalty.
The rules generally apply to periods after they are published in the Federal Register.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.