The Top Ten Issues Addressed by the Final Qualified Opportunity Zone Treasury RegulationsDecember 27, 2019
Michael Hurwitz: Yes, everyone is still talking about the Qualified Opportunity Zone (QOZ) program created by the Tax Cuts and Jobs Act of 2017! On December 19, 2019, the Internal Revenue Service (IRS) and the Treasury Department (Treasury) provided us with an early holiday present by issuing Final Treasury Regulations (Regulations) related to investing in Qualified Opportunity Funds (QOF). Their gift was a mere 544 pages of guidance for taxpayers eligible to elect to defer capital gains that are invested in equity interests in QOFs, as well as guidance on the ability of such taxpayers to exclude from gross income gains recognized after holding those equity interests for at least 10 years.
I believe the Regulations provide us with a yellow brick road to investing in QOZs, so my colleague Alan Blecher and I are taking a walk down that road to examine the top ten issues addressed by the final Regulations.
Al, start us off.
Al Blecher: Thanks, Michael, and counting backward we have #10: Another “180-day clock.” If a partnership does not elect to defer all of its eligible gains, the partner may elect to treat the partner’s own 180-day period with respect to the partner’s distributive share of the gain starting on the last day of the partnership’s taxable year, or the 180-day period beginning on the due date for the partnership’s tax return, without extensions, for the taxable year in which the partnership realized the gain.
#9: Great “flexibility” as it relates to installment sales. An eligible taxpayer may choose the 180-day period to begin on either the date a payment under the installment sale is received for that taxable year (single period), or the last day of the taxable year the eligible gain under the installment method would be recognized but for the deferral allowed for under the OZ regime (multiple periods).
#8: The five-year vacancy requirement to allow a building to qualify under the original-use test has been modified as it was deemed inappropriately long. The final Regulations provide “a special one-year vacancy requirement” for property that was vacant prior to and on the date of publication of the QOZ designation notice that listed the designation of the QOZ in which the property was located, and through the date on which the property was purchased by an eligible entity. Note, however, with respect to property not vacant at such time, but that later became vacant, there is a three-year vacancy period.
#7: Start-up QOZBs will benefit from an “additional 31-month period,” (for a total of 62 months, in the form of multiple overlapping applications or a sequential application) of the working capital safe harbor; provided that each application independently satisfies all of the requirements and any subsequent infusions of working capital assets form an integral part of the plan covered by the initial working capital safe harbor period.
#6: “Gain arising from an inclusion event,” whether representing all or part of the initially deferred gain, is new gain eligible for (re)investment. The 180-day period for investing the gain from an inclusion event begins on the date of such inclusion event.
Michael, you take over from here.
Michael Hurwitz: Alright, Al and the countdown continues with #5: “Tangible property manufactured, constructed, or produced” for use by an eligible entity after December 31, 2017, with the intent to use such property in a trade or business in a QOZ is not disqualified from constituting QOZB property solely because the property is manufactured, constructed, or produced, rather than being purchased, by the eligible entity.
#4: A new “six-month period” for an entity in which a QOF had invested to cure a defect that caused the entity to fail as a QOZB. The final Regulations provide that during that six-month cure period, the QOF can treat the interest held in the entity as a Qualified Opportunity Zone property.
#3: The final regulations provide that “capital gains from the sale of property by a QOZB” that is held in partnership form will be eligible for exclusion as long as the qualifying investment in the QOF has been held for 10 years.
#2: There is a “clarification regarding the basis of a qualifying investment in the hands of a deceased owner’s heir, legatee or beneficiary”. Internal Revenue Code (IRC) Section 1014 (the basis of property acquired from a decedent) does not apply to adjust the basis of an inherited qualifying investment to its fair market value as of the deceased owner’s death.
As real estate professionals, Al and I both feel the #1 issue the final QOZ Regulations addressed pertains to IRC Section 1231 - gains from the sale of business assets. The final Regulations adopt “a gross approach to eligible Section 1231 gains.” That is, taxpayers can defer gross Section 1231 gains without offsetting Section 1231 losses as was previously the case. In addition, under the final Regulations, the character of the eligible Section 1231 gains is not determined until the taxable year in which such gains are taken into account in computing gross income.
Al Blecher: As with any contemplated transaction taxpayers are structuring, especially one which pertains to the deferral of income taxes, investors should consult with their Marks Paneth advisors to determine the best alternative and to help ensure that decisions are reached based on their specific facts and circumstances. The Real Estate Group at Marks Paneth will be closely monitoring future developments and any subsequent guidance regarding final QOZ Regulations.
Michael and Al: If you have any questions, please feel free to reach out to us, and let’s keep the discussion going…
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