Proposed Regulations for Qualified Opportunity Funds:
On October 19, 2018, the Treasury Department released proposed regulations regarding certain aspects of the new qualified opportunity funds ("QOF") and related qualified opportunity zones. In general, the proposed regulations take a liberal reading of the IRC section 1400Z-2 rules regarding (1) the requirements that must be met by a taxpayer in order properly to defer the recognition of gains by investing in a QOF, (2) the rules regarding self-certification as a QOF, and (3) the requirements that must be met by a corporation or partnership in order to qualify as a QOF.
Although only proposed regulations, taxpayers may rely on the new guidance for a variety of important and previously unclear issues. These include determining which gains are eligible for deferral and how deferral elections can be made for investments through pass-through entities.
This article provides a reference guide for the major new information contained in the proposed regulations.
1. Background on QOF and Qualified Opportunity Zones
IRC section 1400Z-2 is a temporary tax provision designed to encourage private sector investment in certain lower-income communities designated as qualified opportunity zones. Taxpayers may elect to defer the recognition of capital gain to the extent of amounts invested in a QOF, provided the gains are invested during the 180-day period beginning on the date such capital gain would have been recognized by the taxpayer. The deferred capital gain will be taxed on the date the investment in the QOF is sold, or on December 31, 2026, whichever comes first.
For investments in a QOF held longer than five years, taxpayers may exclude 10 percent of the deferred gain, and for investments held longer than seven years, taxpayers may exclude a total of 15 percent of the deferred gain. For investments in a QOF held longer than 10 years, taxpayers may also elect to exclude from income the post-acquisition gain on the qualifying investment in the QOF.
In order to properly qualify, a QOF must hold at least 90 percent of its assets in qualified opportunity zone property. The 90 percent requirement is tested every six months. If a QOF fails the 90 percent test, it must pay a penalty for each month it does not meet the 90 percent asset requirement.
Below is a summary of the particular issues for qualified opportunity zones, the way in which the proposed regulations address the issue, and the citation to the proposed regulations.
2. Proposed Regulations
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