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New proposed regulations issued that provide guidance for investment in Qualified Opportunity Funds

The IRS just issued new proposed regulations and a Revenue Ruling clarifying the application of the new provisions for Qualified Opportunity Funds (QOFs), a tax incentive initiated as part of the new tax law. QOFs offer a significant tax saving opportunity for longer term investors who recognize capital gains. The highly anticipated regulations clarify that any type of gain treated as a capital gain on a taxpayer’s tax return now qualifies for the election. Elections can be made by individuals, partnerships, C-corporations, S-corporations and some trusts.

QOF primary tax benefits:

  • Deferral of tax on current year capital gains to 2026.
  • 15 percent reduction of the capital gain to be reported in 2026 if the investment remains in the fund for seven years.
  • No capital gain on the underlying investment in the fund if the investment remains for 10 years.

QOF key provisions:

  • There is no requirement to improve land in a Qualified Opportunity Zone (QOZ). The recent ruling states “the basis attributable to land on which such a building sits is not taken into account in determining whether the building has been substantially improved.”
  • Must be an equity investment in a QOF and can include preferred stock or partnership interest with special allocations, but debt or investment that is treated as debt is not eligible.
  • Investment in a fund must be made within 180 days of when the gain occurs. Gains that flow through to an owner on a K-1 may be treated as occurring either on the actual date of sale or the end of the flow through entities year, whichever the taxpayer chooses.
  • Any investment in a QOF that doesn’t come from eligible gains is treated as a separate investment. Only the investment from a qualified gain is eligible for permanent exclusion of gain after 10 years.
  • A gain may be split into separate QOF investments by separating the gain into distinct segments and investing in different funds.
  • Gains from sales to related parties are not eligible for deferral. Qualifying assets must be acquired after 2017, by purchase from an unrelated party.
  • The basis step up for the investment in the QOF that occurs after a 10-year period is available until 2047, 20 years after the QOZ designations expire.
  • The working capital rule allows entities to hold cash for up to 31 months as part of a plan to build or rehabilitate QOZ property.

To learn more about the QOF regulations and how it could impact you personally or your business, please contact Carol Wright, Principal | Rehmann Tax Services at 248.614.6454.

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