The Treasury Department released final regulations on December 19, 2019, for the 2017 enacted Opportunity Zone program. These final regulations merged the October 2018 and May 2019 proposed regulations into one final set of regulations with some additional changes and clarifications.
180-day investing period and 1231 gains
Under the proposed regulations there were some special rules around the timing of the 180-day start date of the 1231 gain investing period. These are gains from the sale of property used in a trade or business. Under the proposed rules, the 180-day period started at the end of the tax year of the entity which created the 1231 gain.
Significant changes were made in the final regulations to help ease this confusion. Under the final regulations, the 180-day period for investing 1231 gains now starts on the day of sale which created those gains. This change brings the start date inline with that of other capital assets, like the sale of stocks. Also, the requirement of only having “net” 1231 gains eligible for deferral has been removed.
There are now three options for capital gains from pass-throughs (Partnerships, S-Corporations) entities that do not elect to defer capital gains. The partner/shareholder can start their 180-day period from (1) the pass-throughs start date (date of sale), (2) the final day of the pass-throughs tax year, (3) the due date for the pass-throughs tax return, without extension.
Under the proposed regulations, used or existing property had to be substantially improved by 100% of its basis. This was to be tracked on an asset by asset basis causing a substantial accounting burden. The final regulations provide a solution to this by allowing assets to be aggregated, but other special rules apply.
The Treasury changed the rules on how long a building must be vacant to avoid the substantial improvement test. The proposed regulations required that the property be vacant for at least five years. The final regulations shortened that period to one year if the property was vacant at the time the census tract was designated an opportunity zone. If the property was vacant after the OZ designation, then it must be vacant for three years to avoid substantial improvement.
Under the final regulations, there are now two methods for determining the 180-day start date for gains from an installment sale. The taxpayer can choose to recognize and start the 180-days on either the date a payment under the installment sale is received for that taxable year or the full amount of gain on the last day of the taxable year the sale was made.
Sale after 10-Year hold
The final regulations have clarified several sale situations that are eligible for the tax-free capital gain treatment after a 10-year holding period. The sale of a Qualified Opportunity Fund interest held by an investor, sale of a directly-owned property by a QOF, sale of an interest in a partnership, limited liability company, or stock held by a QOF, and sale of property held by a Qualified Opportunity Zone Business partnership, LLC, or corporation in which the QOF invests. As stated in the proposed regulations any sales before the 10-year hold period tracked by each individual investment in a QOF will not receive the favorable tax treatment. Fortunately, these gains can be reinvested into another QOF to deferred through 2026.
Windham Brannon’s Opportunity Zone Consulting Expertise
While the 544 pages of final regulations released in December 2019 provide many more updates and clarifications than previous regulations released in 2019, questions still linger.
Windham Brannon advisors are here to help you navigate the ins and outs of the Opportunity Zone Fund program.