Proposed regulations addressing the gains that may be deferred when taxpayers invest in a qualified opportunity fund (QOF) have been issued.
Proposed regulations addressing the gains that may be deferred when taxpayers invest in a qualified opportunity fund (QOF) have been issued. Taxpayers may generally rely on these new proposed regulations, and the IRS has also requested comments.
The proposed regulations also withdraw and replace placeholder provisions in an earlier set of proposed regulations (REG-115420-18). These concern:
In addition, within a few months the IRS expects to address administrative rules for a QOF that fails to maintain the required 90% investment standard, as well as information reporting requirements.
Finally, the IRS expects to revise Form 8996, Qualified Opportunity Fund, for 2019 and subsequent tax years. These revisions may require additional information, including the employer identification number (EIN) for the QOF business, and the amounts invested by QOFs and QOZ businesses located in particular QOZs.
The 2018 regulations provided that a trade or business satisfies the “substantially all” test for a QOZ business if at least 70 percent of its tangible property is qualified opportunity zone business property. The new proposed regulations generally extend this 70% threshold to the “substantially all” tests for use. However, in the holding period context, the “substantially all” threshold is 90%.
The proposed regulations generally provide that the “original use” of tangible property acquired by purchase by any person starts on the date when that person or a prior person:
Used tangible property will satisfy the original use requirement with respect to a QOZ if the property has not been previously used (that is, has not previously been used within that QOZ in a manner that would have allowed it to be depreciated or amortized) by any taxpayer.
In addition, a building or other structure that has been vacant for at least five years before being purchased by a QOF or QOZ business satisfies the original use requirement. Improvements made by a lessee to leased property satisfy the original use requirement and are considered purchased property for the amount of the unadjusted cost basis of the improvements.
Land can be treated as QOZ business property only if it is used in a trade or business of a QOF or QOZ business. The holding of land for investment does not give rise to a trade or business, and the land cannot be QOZ business property. Anti-abuse rules determine whether unimproved land can be qualifying property. However, other purchased real property generally must be substantially improved, determined on an asset-by-asset basis.
Leased tangible property may be QOZ property if:
However, the first-use requirement does not apply to leased tangible property. The leased property can generally also be acquired from a related person, though several conditions apply. The proposed regulations also provide methods for valuing the leased property.
The proposed regulations:
The proposed regulations also address:
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