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New Regulations Regarding Qualified Opportunity Zone Investments

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One of the most important decisions made by The Tax Cuts and Jobs Act (TCJA) involved investments in qualified opportunity zone business properties. Designed to encourage growth and investment in certain distressed areas, these provisions created a federal income tax benefit for taxpayers who invest in businesses located in these areas.

The IRS recently issued new regulations to provide guidance to taxpayers on the consequences of these investments. If you have questions about these regulations and how they could affect your own tax situation, it is important to contact Florida tax & IRS attorney Ronald Cutler who has the experience and resources to assist you.

Tax Incentives  

The TCJA created two major tax incentives to encourage investment in qualified opportunity zones, the first of which involves the deferring of certain gains as gross income if a taxpayer chooses to invest a corresponding amount in a qualified opportunity zone. Under the new changes, qualifying gains will be deferred until the investment is either sold or exchanged, or by December 31, 2026, whichever date occurs earlier. The law also states that a portion of a deferred gain will be permanently excluded if the corresponding investment is held for five or seven years. The second incentive allows taxpayers to choose to exclude the post-acquisition gain on investments in a qualified opportunity zone from their gross income, but only for investments that are held for at least ten years.

There are, however, a few situations when deferred gains are considered taxable that apply when an investor transfers an interest in a qualified opportunity fund. If, for instance, a transfer took the form of a gift, the gain could become taxable. Inheritance by a surviving spouse, on the other hand, is a nontaxable transfer, nor is a transfer of an ownership interest in a fund, upon the owner’s death, to an estate or revocable trust that becomes irrevocable upon the original owner’s death.

Defining Qualified Opportunity Zone Business Property  

The recently published regulations also clarifies the definition of a qualified opportunity zone business property as tangible property that is used in the business or trade of a qualified opportunity fund, but only if the property was acquired after the last day of 2017. This same definition applies to tangible property acquired under a market rate lease as long as during substantially all of the holding period of the property, substantially all of the use of the property in question was in a qualified opportunity zone.

Fortunately, the regulations also clarified the “substantially all” requirements to mean, when it comes to the use of the property, that at least 70 percent of the property was used in a qualified opportunity zone. For the holding period of the property, however, the property must qualify as an opportunity zone business property for at least 90 percent of the company’s holding period. Finally, if the investment involves a partnership or corporation, the business must have been a qualified opportunity zone business for no less than 90 percent of the fund’s holding period to satisfy the substantially all element.

Schedule a Free One-on-One Consultation Today 

If you have questions about the new qualified opportunity zone tax deferral rules, please call dedicated Florida tax law attorney Ronald Cutler, P.A. at 386-490-9949 today. A member of our legal team is standing by to help you schedule a one-on-one consultation.

Resources:

irs.gov/pub/irs-drop/reg-120186-18-nprm.pdf

irs.gov/newsroom/irs-issues-guidance-relating-to-deferral-of-gains-for-investments-in-a-qualified-opportunity-fund

https://www.hotlineforhelp.com/ein-application-process-revised/