On October 19, 2018, the IRS issued the aboriginal set of proposed regulations and a New Revenue Ruling on new Internal Revenue Code Section 1400Z-2 administering Opportunity Zone investments.
Under the new Opportunity Zone tax law, taxpayers who apprehend taxable basic assets from the auction of any asset (stock, property, etc.) and who reinvest those assets into “Qualified Opportunity Funds” (“QOFs”) or “Qualified Opportunity Zone Property” (“QOZP”) will be acceptable to accept cogent tax benefits, including cessation of their aboriginal gain, abridgement of their aboriginal taxable assets afterwards captivation periods of bristles years or seven years, and no tax on basic assets accomplished from the new advance in a QOF or QOZP afterwards a captivation aeon of 10 years.
The aboriginal set of proposed regulations issued by the IRS beneath Code Section 1400Z-2 awning a cardinal of issues that administer to alone taxpayers with account to assets acceptable for deferral, types of taxpayers acceptable for deferral, the “180-day rule” defining back a able advance charge be fabricated in adjustment to authorize for the deferral, and how to accept a cessation of the antecedent basic gain. In addition, the proposed regulations, forth with new Revenue Ruling 2018-29, accommodate advice to absolute acreage developers gluttonous to anatomy QOFs or actuate whether their backdrop authorize as QOZP. This commodity focuses on the regulations and the Revenue Ruling that administer to QOFs and QOZP, and addresses how those regulations and the Revenue Ruling will advice absolute acreage developers gluttonous to accession Opportunity Zone investments to accounts absolute acreage development.
How to baptize an article as a QOF and how that Impacts the 90% Analysis for Eligibility as a QOF
The Regulations specify that any association or article burdened as a partnership, including above-mentioned entities, may self-certify as a QOF by application a anatomy that has been proposed by the IRS. The Regulations added acquiesce the QOF to accept the ages in which the article elects to be appointed a QOF. If the QOF does not baptize a ages on the tax form, the Regulations accommodate that the appellation will arise with the aboriginal ages of the taxable year of the entity. This is important, because a QOF charge authority at atomic 90% of its assets in QOZP as abstinent on the aftermost day of the aboriginal 6-month aeon of the taxable year of the QOF and on the aftermost day of the taxable year of the QOF. Therefore, if a QOF designates January as the aboriginal ages of designation, the aboriginal six ages analysis will administer in July. If a QOF designates any ages afterwards June of the taxable year, the Regulations accompaniment that the aboriginal analysis aeon will be the end of the aboriginal taxable year.
How to admeasurement whether a QOF meets the 90% Asset Analysis and the Special Rule for Alive Capital
The Regulations accompaniment that a QOF will accommodated the 90% Asset Analysis if the asset ethics appear in its banking statements for the taxable year appearance that 90% of its assets are QOZP. Alternatively, if the QOF has no banking statements, again the analysis will be based on the bulk of the assets. The Regulations additionally accommodate a actual important allowance for absolute acreage developers, insofar as they acquiesce a QOF to authority alive basic in the anatomy of banknote for up to 31 months if the QOF has a accounting plan to advance the banknote in QOZP and a accounting agenda to advance the banknote in QOZP, and the QOF essentially complies with that business plan and schedule. This in aftereffect allows a developer a aeon of 31 months afterwards antecedent appellation as a QOF to complete the advance of the abounding bulk of basic aloft for a development in an Opportunity Zone.
For QOFs that conduct business through abstracted entities, alone 70% of the actual assets of those abstracted entities are appropriate to be Able Opportunity Zone Business Property
The Code provides that a QOF itself is appropriate to authority at atomic 90% of its assets in QOZP, which may abide of stock, affiliation interests or Able Opportunity Zone Business Acreage (“QOZBP”). However, QOZP itself is authentic as a business in which “substantially all” of the actual acreage of such business is QOZBP. The regulations ascertain this accurate use of the appellation “substantially all” to beggarly 70% of the actual acreage of the QOZP. What this agency is that if a QOF holds assets consisting of banal or affiliation interests in one or added abstracted entities, anniversary of those entities is appropriate to authority at atomic 70% of their actual acreage in QOZBP. This in about-face agency that if a QOF holds all of its assets through abstracted entities, again finer alone 63% (90% x 70%) of the alongside endemic actual assets of the QOF are appropriate to be QOBP, because anniversary one of the abstracted article backing is alone appropriate to authority 70% of its assets in QOBP.
For bigger absolute property, abundant advance alone requires that the amount of the architecture be increased, not the amount of the land
This may be the best cogent of the IRS advice for absolute acreage developers, because it may accessible the achievability for abounding added backdrop to be redeveloped. For this, the IRS issued Revenue Rule 2018-29, which asks and answers three questions:
What this agency is that if the amount of the architecture is 40% and the amount of the acreage is 60% of the accumulated amount of the bigger property, again the developer alone needs to admission the base in the acreage by the amount of the architecture – not the amount of both the acreage and the building. The acreage will still be advised as essentially bigger and accordingly included in the 90% Asset Test. This may acquiesce added backdrop to be acquired and redeveloped than originally appeared in the statute.
There is a achievability that acreage acquired afore December 31, 2017 may be fabricated acceptable in approaching regulations
The Regulations independent a account that the Treasury Department is requesting animadversion on whether there is a approved base for added adaptability on the affirmation that acreage charge be acquired afterwards December 31, 2017, because that ability facilitate accord in the affairs by a greater cardinal of above-mentioned entities. This would be a acceptable change, because it would not amerce acreage owners who already own acreage in Opportunity Zone areas, but accept not ahead been able to allure abundant basic to advance those properties. As a action matter, it does not assume all-important to amerce absolute owners of Opportunity Zone acreage by acute them to advertise their acreage to acquiesce addition abroad to booty advantage of the new basic admission created by the Opportunity Zone tax incentives.
Reinvestments by QOFs will be addressed in approaching regulations
The proposed Regulations do not accommodate any specific requirements apropos reinvestment of gain of sales of QOZP, but accompaniment that the IRS will anon absolution regulations that will accommodate advice on reinvestment requirements and the reasonable time aeon appropriate for reinvestment.
The time aeon for investments in QOFs has been finer extended
According to the proposed Regulations, a aborigine gluttonous to accomplish a cessation acclamation with account to basic assets invested in a QOF will be accustomed to accomplish the cessation acclamation until June 29, 2027, and the aborigine will be accustomed to affirmation the tax account of the QOF advance until December 31, 2047. This seems to beggarly that taxpayers could accomplish investments in QOFs until as backward as June 29, 2027.
Taxpayers may await on these regulations afore the able date
The proposed regulations will become able aloft advertisement in the Federal Register, which is accepted to action aural about 60 days. However, taxpayers are acceptable to await aloft these proposed regulations with account to acceptable gains, dispositions of investments in Able Opportunity Funds (“QOFs”), taxable years that activate afore the final regulations and investments fabricated afore the final date of the regulations.
These proposed regulations accommodate several accessible clarifications that will acquiesce added absolute acreage developers to advance the basic from taxpayers gluttonous the account of the Opportunity Zone tax incentives. Developers absorbed in accessing this new basic should acquaintance their acknowledged and tax accountants anon to actuate how they can anatomy their projects in a address that will accommodated these requirements.
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