Proposed Regs, Guidance on Qualified Opportunity Fund Investments (article)

Proposed Regs, Guidance on Qualified Opportunity Fund Investments (article)

Glasses sit on top of tax form.

The IRS has issued proposed regulations relating to the deferral of gain under Code Sec. 1400Z-2 for investments in a qualified opportunity fund. The provision, which was as added by the Tax Cuts and Jobs Act (TCJA), allows taxpayer to elect to defer capital gains that are invested in a qualified opportunity fund within 180 days after the sale or exchange triggering the gain. The gain is deferred until the earlier of December 31, 2026, or the date the investment in the fund is sold. In addition, if the fund investment is held for 10 years, a taxpayer may make a basis step-up election to avoid tax on any appreciation in the value of the investment.

The proposals cover the types of gain that investors can defer, the deadlines for investing corresponding amounts of gain in a qualified opportunity fund, the manner in which investors elect to defer gain, and other matters.

Eligible Gains

Only capital gains are eligible for deferral. Generally, the capital gain must result from an actual or deemed sale or exchange or otherwise be includible in a taxpayer’s computation of capital gain. Ordinary gains and gains from sales to related parties are not eligible. Only capital gain that would be recognized no later than December 31, 2026, if the deferral provision did not apply, may be invested and deferred.

The tax attributes of deferred gain are preserved during the deferral period and taken into account when the gain is later included in income.

A taxpayer may make multiple elections within the 180-day investment period for various parts of gain from a single sale or exchange of property.

Regarding Code Sec. 1256 contracts, a taxpayer may only defer capital gain net income for a tax year. The 180-day period for investing the gain begins on the last day of the tax year. Gain from Code Sec. 1256 contracts that are part of an offsetting-positions transaction in which any of the other positions are not also Code Sec. 1256 contracts does not qualify for deferral.

Capital gain from a position that is or has been part of an offsetting-positions transaction (except where all positions are Code Sec. 1256 contracts) is not eligible for deferral. Offsetting-position transactions are specially defined by the proposals and include most straddles.

Eligible Taxpayers

Only taxpayers of the type that recognize capital gain can elect to defer gain. These taxpayers include:

  • Individuals;
  • C corporations (including regulated investment companies (RICs) and real estate investment trusts;
  • Partnerships;
  • Certain other pass-through entities, including common trust funds; and
  • Qualified settlement funds, disputed ownership funds, and other entities taxable under Reg. §1.468B.

Partnerships and partners may separately invest in qualified opportunity funds and defer recognition of gain. Similar rules apply to other pass-thru entities. If a partnership has recognized gain and does not elect deferral, a partner may make the election with respect to its distributive share of gain.

Eligible Investments

Qualified investments only include equity interests in a qualified opportunity fund. Preferred stock and partnership interests with special allocations are considered equity interests. Debt instruments and deemed contributions of money as the result of a partner’s assumption of partnership liabilities or increase in a share of partnership liabilities do not qualify. A qualified investment may be used as collateral for a loan.

If a taxpayer sells or exchanges an interest in a qualified opportunity fund, the taxpayer is eligible to reinvest in another fund to defer tax on the previously deferred gain. The taxpayer, however, must sell or exchange the entire initial investment.

180 Day Rule

Generally, a taxpayer must invest in a qualified opportunity fund during the 180-day period beginning on the date that the sale or exchange of the capital asset takes place. The proposals provide special rules for determining the beginning of the 180-day period if the capital gain is the result of a "deemed" sale and there is no statutory language providing a specific date for the deemed sale.

Land and Buildings

The basis of land purchased along with a building in a qualified opportunity zone is not taken into account in determining whether a building is substantially improved. The same conclusion is reached in a separate revenue ruling issued in conjunction with the proposals (Rev. Rul. 2018-29). This approach is expected to facilitate the rehabilitation of vacant buildings in qualified opportunity zones.

Basis Step-up Election

Taxpayers may avoid recognizing appreciation on their investment in a qualified investment fund if the investment is held at least 10 years. This is done by making a basis step-up election. The proposals clarify that the election may be made after qualified opportunity zones designations expire on December 31, 2028.

Form 8949

Taxpayers may make a deferral election on Form 8949 attached to the return for the tax year in which the gain would have been recognized if it had not been deferred. A draft version of Form 8949 and its separate instructions is available at www.IRS.gov/DraftForms.

This form is also used by a corporation or partnership to self-certify as a qualified opportunity fund and for annual reporting compliance purposes. The proposals provide that an existing entity may self-certify as a qualified opportunity fund.

Effective Date

The regulations are proposed to be effective on or after the date of publication as final regulations. In general, however, taxpayers may rely on the proposals prior to this date if they are relied upon in their entirety and in a consistent manner.

More Regs Expected

Additional regulations will be issued to address the meaning of "substantially all" in various contexts, the types of transactions that will trigger the inclusion of deferred gain, the definition of a “reasonable period” for a fund to reinvest proceeds from the sale of qualifying assets without paying a penalty, administrative rules applicable when a fund fails to maintain the required 90 percent investment standard, and information reporting requirements.

Public Hearing

A public hearing is scheduled for January 10, 2019. The IRS is soliciting comments on all aspects of the proposals, including the definition of "original use" and "substantial improvement."

 

Tax Reform Guide thumbnail


Copyright © 2018, CCH INCORPORATED. All Rights Reserved. Contents of this publication may not be reproduced without the express written consent of CCH and CBIZ. To ensure compliance with requirements imposed by the IRS, we inform you that—unless specifically indicated otherwise—any tax advice in this communication (and any attachments) is not written with the intent that it be used, and in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or recommend to another person any tax related matter. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC and other Financial Services subsidiaries of CBIZ, Inc. (NYSE: CBZ) that provide tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies.

Proposed Regs, Guidance on Qualified Opportunity Fund Investments (article)~/Portals/0/PackFlashItemImages/WebReady/TaxThumb.jpghttps://www.cbiz.com/Portals/0/liquidImages/WebReady/TaxThumb.jpgThe IRS clarified provisions of the TCJA's Qualified Opportunity Zone program, including uncertainty around the program's expiration date....2018-10-30T16:11:28-05:00

The IRS clarified provisions of the TCJA's Qualified Opportunity Zone program, including uncertainty around the program's expiration date.

Real EstateOpportunity Zones