Opportunity Zone Proposed Regulations Sent to Office of Management and Budget for Review

The IRS has sent regulations related to capital gains invested in Opportunity Zones to the Office of Information and Regulatory Affairs of the Office of Management and Budget (RIN 1545-BP03).  The regulation is flagged as a Tax Cuts and Jobs Act regulatory action, meaning that OMB has 10 business days to complete its review of these regulations under the agency’s memorandum of agreement with the Department of Treasury.

The regulations were received by the agency on September 12, which would put the date by which OMB is supposed to finish its review prior to end of September.

The qualified opportunity zone fund provides several benefits to investors in a qualified fund.  Those include:

  • The ability to defer gains from the sale of property held by the taxpayer sold to a third party so long as the gain is invested in a qualified opportunity zone fund within 180 days beginning on the date of sale of the gain producing property.  [IRC §1400Z-2(a)]

  • The deferred gain is includable in income on the earlier of the date the investment in the fund is sold or December 31, 2026.  However, this deferred gain is slowly transformed to tax-exempt gain over time.  If the investment is held over 5 years, the basis in the deferred gain (which starts out at zero) is increased to 10% of the deferred gain.  If the taxpayer holds the property more than 7 years, the excluded gain increases by an additional 5% of the deferred gain. [IRC §1400Z-2(a)(2)(B)]

  • If the qualified opportunity fund investment is held for at least 10 years, the taxpayer may elect to have the basis of such property set as equal to the fair market value of the investment on the date the investment is sold or exchanged.  [IRC §1400Z-2(c)]

If the taxpayer makes investments in the fund both of amounts to which the special deferral applies and other investments, the investment shall be treated as two separate investments and the special gain rules described above found in IRC §1400Z-2(a), (b) and (c) will apply only to the portion of the investment that came from the deferred gain investment.[1]

The tax benefits of this program, especially the ability to defer and eventually eliminate paying tax on gains realized on the disposition of other property, has attracted a lot of attention.   However, taxpayers have been reluctant to commit to these programs until seeing more about the nature of the guidance the IRS will provide.

[1] IRC §1400Z-2(e)