"Opportunity Zone Benefits; Nuts and Bolts; and Loose or Missing Screws" By J Leigh Griffith and Shane P Morris Taxes - The Tax Magazine
The Tax Cuts and Jobs Act of 2017 (the “TCJA”) created a new tax incentive designed to encourage long-term investment in low income communities, as defined in Code Sec. 45D(e),1 which are specifically designated as “qualified opportunity zones” (“QOZs”) in accordance with procedures set forth in Code Sec. 1400Z-1.2
Generally, the qualified opportunity zone legislation is designed to encourage investment in QOZs by providing taxpayers who invest in specially defined investment vehicles called “qualified opportunity funds” (“QOFs”) with (i) deferral of certain gains recognized by the taxpayer between January 1, 2018, and December 31, 2026, that are invested in QOFs within 180 days of the realization of such gains, (ii) the permanent exemption of up to 15% of those gains if the investment in the QOF is held for certain prescribed time periods, and (iii) the potential permanent exemption of all appreciation in the investment of those gains in the QOF if the investment is held for at least 10 years.
The QOZ statute left many unanswered questions that need to be answered before sponsors could realistically start forming QOFs. On October 29, 2018, the U.S. Department of the Treasury and Internal Revenue Service published proposed regulations under Code Sec. 1400Z-23 (the “Proposed Regulations”) addressing many of these questions, but others still remain unanswered. The IRS initially announced that another round of proposed regulations is expected to be published before the end of 2018. However, at the time of the writing of this article, the second set of proposed regulations had not been published, and the authors would not be surprised if they are not released until the middle of the first quarter of 2019. This article will discuss the incentive available to taxpayerswho invest in a QOF as well as the detailed requirements found in the Proposed Regulations to be a QOF.
Under Code Sec. 1400Z-1(b), the chief executive of each State, the District of Columbia and each U.S. territory could nominate the greater of up to 25% of the lowincome communities as defined in Code Sec. 45D(e) of a State, District of Columbia or Territory (except all lowincome communities in Puerto Rico were automatically designated4 ) or if the number of low-income communities in the State is less than 100, up to 25 could be designated as QOZs. A limited number of census tracks that were not low-income communities but were adjacent to lowincome communities could also be nominated for such designation.5 The Secretary of the Treasury was to review the nominations and certify such tracts as QOZs. Over 8700 zones were nominated and certified.6 A complete list of all certified opportunity zones can be found in Notice 2018-48.7 QOZs have been designated in all 50 states, Puerto Rico, Guam, the Commonwealth of Northern Mariana Islands, American Samoa, and the U.S. Virgin Islands. The designation is final and began on the date of designation and ends at the close of the 10th calendar year beginning on or after such date of designation (i.e., December 31, 2028).8 After such time, new investments in the QOF will not qualify for the tax benefits of the QOZ, but existing investments in the QOF can continue to be held and qualify for the 100% basis step-up on a sale on or before January 1, 2048.9 A useful map of the QOZs can be found on the Treasury Department’s Community Development Financial Institutions Fund website.10
click here to read more