Tax Alert: Key Issues Addressed in Final QOZ Treasury RegulationsBy Michael W. Hurwitz | Alan M. Blecher | January 8, 2020
Following two rounds of proposed regulations, the Internal Revenue Service (IRS) and the Treasury Department (Treasury) issued Final Treasury Regulations (Regulations) related to investing in Qualified Opportunity Funds (QOF) on December 19, 2019. Below are highlights from the comprehensive, 544-page Regulations.
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.
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 under the Qualified Opportunity Zone (QOZ) regime (multiple periods).
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 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 listing 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.
Start-up Qualified Opportunity Zone Businesses (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.
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.
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.
A new six-month period has been established for an entity in which a QOF had invested to cure a defect that caused the entity to fail as a QOZB. The Regulations provide that during that six-month cure period, the QOF can treat the interest held in the entity as QOZ property.
The 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.
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 (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.
Arguably, the most important issue addressed by the final QOZ Regulations pertains to IRC Section 1231 - gains from the sale of business assets. The Regulations adopt a gross approach to eligible Section 1231 gains. That is to say, 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.
The Regulations addressed many of the questions that had been plaguing industry professionals and investors since the program’s inception in the Tax Cuts and Jobs Act of 2017, including providing 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. This may make it easier for those considering and/or currently investing in Opportunity Zones.
As with any transaction structuring, especially one which includes the deferral of income taxes, investors should consult with their advisors to determine appropriate strategies for their specific circumstances. For more information on the Qualified Opportunity Zones program, visit Marks Paneth’s Opportunity Zones Resource Center or contact a member of our Real Estate Group.
About Michael W. Hurwitz
Michael W. Hurwitz, CPA, MST, is a Partner and REIT Group Leader at Marks Paneth LLP. Mr. Hurwitz brings more than 30 years of experience and a versatile set of skills acquired through working for both public and private companies in the real estate sector. His industry knowledge spans a vast number of areas including real estate tax issues, public and private real estate investment trusts (REITs), opportunity funds, portfolio restructurings, acquisitions and dispositions, partnership... READ MORE +
About Alan M. Blecher
Alan M. Blecher, JD, is a Principal at Marks Paneth LLP. Mr. Blecher has considerable experience serving high-income and high-net-worth individuals and their closely held businesses. He focuses especially on partnerships, limited liability companies and S corporations. He has been in public accounting since 1985 and has been involved in tax planning for numerous transactions. These include transactions involving public debt offerings, sales of family businesses and restructurings of distressed entities, among others. Mr. Blecher... READ MORE +