October 22nd, 2018

New Qualified Opportunity Zone IRS Regulations

On October 19, 2018, the Treasury Department and IRS issued proposed Qualified Opportunity Zone regulations and guidance and Qualified Opportunity Fund requirements.

As mentioned previously, Governor Wolf designated 300 tracts of land across Pennsylvania as “qualified opportunity zones” that entice investors through tax breaks and encourage economic development throughout the Commonwealth. The Lehigh Valley contains several opportunity zones in Allentown, Bethlehem, and Easton.

Some of the items that are clarified in the new regulations include:

  • Only capital gains are eligible for deferral under the legislation. There has been some discussion about the inclusion of ordinary gain as well, but the regulations clarify that only gain that is treated as capital gain for Federal tax purposes are eligible.
  • It is possible to invest funds in a Qualified Opportunity Fund (QOF) that are not eligible for a deferral, but that investment must be treated as a separate investment for Federal tax purposes.
  • Self-Certification of a QOF and annual compliance reporting by each QOF will be done on a form 8996 which will then be attached to a taxpayer’s Federal tax return.
  • Deferral elections will be made on a Form 8949 which will be attached to the taxpayer’s Federal income tax return. No separate filing will be required. Because deferrals have been made by taxpayers in 2018, this process and the form will need to be finalized early in 2019 to allow filing of 2018 returns.
  • A partnership may elect to defer all or part of a capital gain any time it makes an eligible investment in a QOF and if the partnership does not elect a deferral, individual partners may do so.
  • Although the designated Qualified Opportunity Zones expire in 2028, based on the current legislation, the regulations allow for the 10-year stepped-up basis election even if the Zone designation expires prior to the taxpayer holding the investment for 10 years.

These new qualified opportunity zone regulations are open for public comment for 60 days and a public hearing on the regulations will be held on January 10, 2019.  We expect the final regulations will issued soon thereafter. More to come!

Attorney Jack Gross is an experienced business and real estate attorney and provides counsel to commercial clients throughout the Lehigh Valley region. Jack has experience working with investors and qualified opportunity zones in Pennsylvania.

The content found in this resource is for informational reference use only and is not considered legal advice. Laws at all levels of government change frequently and the information found here may be or become outdated. It is recommended to consult your attorney for the most up-to-date information regarding current laws and legal matters.