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October 24, 2018

IRS Issues Proposed Regulations and Guidance on Opportunity Zones

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On October 19, the IRS and Treasury Department issued long-awaited proposed regulations, Revenue Ruling 2018-29 (the “Revenue Ruling”), and draft forms regarding the Opportunity Zone program to encourage private investment in low-income communities.

Enacted as part of the Tax Cut and Jobs Act of 2017, Sections 1400Z-1 and 1400Z-2  of the Internal Revenue Code of 1986, as amended (the “Code”) establishes the Opportunity Zone program as the first new federal economic development tax incentive since the popular New Markets Tax Credit Program was enacted in 2000.  This program is designed to provide a federal tax incentive for investors to reinvest capital gains generated in 2018 into economically distressed areas.

The program allows a taxpayer to defer federal income tax on capital gains due upon the sale of property (any property type, real or personal) if the capital gains are reinvested within 180 days in a Qualified Opportunity Fund (“QOF”) in a Qualified Opportunity Zone (“QOZ”).  A QOZ is a low-income area, determined on a census tract basis, where new investments, under certain conditions amplified under the new regulations and Revenue Ruling, may be eligible for preferential tax treatment. Those gains are deferred until December 31, 2026; or, if earlier, the gains will be recognized upon the sale of the investment in the QOF. If the investment in the QOF is held for ten years, a taxpayer may elect to step-up basis in the investment to eliminate tax on any appreciation on the investment value. There are approximately 9,000 QOZs in the United States, including 514 QOZs in New York State.

The regulations and the Revenue Ruling contain proposed guidance addressing the type of gains that may be deferred by investors, the time by which corresponding amount must be reinvested in QOFs, and the manner in which investors may elect to defer specified gains.

For example, only capital gains may be deferred, and taxpayers must invest in a QOF within the 180-day period beginning on the day of the sale or exchange of the capital asset. Taxpayers may make multiple elections within these 180 days.

In addition, the regulations amplify rules relating to QOFs, including self-certification, valuation of QOF assets and guidance on qualified opportunity zone businesses. Proposed Form 8996, Qualified Opportunity Fund, will be used by QOFs to self-certify and for annual reporting compliance. The Revenue Ruling discusses particular QOZ issues pertaining to a QOF’s purchase of an existing building located in a QOZ, providing that the basis of the underlying land purchased with an existing building is not taken into account in determining whether such a building is deemed “substantially improved” in accordance with the regulations

A public hearing on the regulations is scheduled for January 10, 2019 at 10:00 a.m. in the IRS Auditorium in Washington, D.C.  In the meantime, you can review a full text of the IRS regulations and Revenue Ruling on its website. We will continue to provide updates as the regulations move toward adoption.

If you have any questions about the matters in this Legal Alert or any other legal issues, please contact the following attorneys, or the Harris Beach attorney with whom you usually work: Robert Murray at (716) 200-5180 / bmurray@harrisbeach.com; Pietra Zaffram at (716) 200-5112 / pzaffram@harrisbeach.com; Francis L. Gorman at (585) 419-8628 / flgorman@harrisbeach.com; Shawn Griffin at (585) 419-8614 / sgriffin@harrisbeach.com; Marybeth Orsini at (585) 419-8725 / morsini@harrisbeach.com; Kevin Bezio at (518) 701-2718 / kbezio@harrisbeach.com; Justin Miller at (518) 701-2710 / jmiller@harrisbeach.com;  Robert Ryan at (518) 701-2715 / rryan@harrisbeach.com;  Michael Curti at (914) 298-3026 / mcurti@harrisbeach.com; Thomas Garry at (516) 880-8489 /  tgarry@harrisbeach.com; and Andrew Komaromi at (516) 880-8385 / akomaromi@harrisbeach.com.

This alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, Melville, New York City, Rochester, Saratoga Springs, Syracuse, Uniondale and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.

IRS Issues Proposed Regulations and Guidance on Opportunity Zones

Insight

On October 19, the IRS and Treasury Department issued long-awaited proposed regulations, Revenue Ruling 2018-29 (the “Revenue Ruling”), and draft forms regarding the Opportunity Zone program to encourage private investment in low-income communities.

Enacted as part of the Tax Cut and Jobs Act of 2017, Sections 1400Z-1 and 1400Z-2  of the Internal Revenue Code of 1986, as amended (the “Code”) establishes the Opportunity Zone program as the first new federal economic development tax incentive since the popular New Markets Tax Credit Program was enacted in 2000.  This program is designed to provide a federal tax incentive for investors to reinvest capital gains generated in 2018 into economically distressed areas.

The program allows a taxpayer to defer federal income tax on capital gains due upon the sale of property (any property type, real or personal) if the capital gains are reinvested within 180 days in a Qualified Opportunity Fund (“QOF”) in a Qualified Opportunity Zone (“QOZ”).  A QOZ is a low-income area, determined on a census tract basis, where new investments, under certain conditions amplified under the new regulations and Revenue Ruling, may be eligible for preferential tax treatment. Those gains are deferred until December 31, 2026; or, if earlier, the gains will be recognized upon the sale of the investment in the QOF. If the investment in the QOF is held for ten years, a taxpayer may elect to step-up basis in the investment to eliminate tax on any appreciation on the investment value. There are approximately 9,000 QOZs in the United States, including 514 QOZs in New York State.

The regulations and the Revenue Ruling contain proposed guidance addressing the type of gains that may be deferred by investors, the time by which corresponding amount must be reinvested in QOFs, and the manner in which investors may elect to defer specified gains.

For example, only capital gains may be deferred, and taxpayers must invest in a QOF within the 180-day period beginning on the day of the sale or exchange of the capital asset. Taxpayers may make multiple elections within these 180 days.

In addition, the regulations amplify rules relating to QOFs, including self-certification, valuation of QOF assets and guidance on qualified opportunity zone businesses. Proposed Form 8996, Qualified Opportunity Fund, will be used by QOFs to self-certify and for annual reporting compliance. The Revenue Ruling discusses particular QOZ issues pertaining to a QOF’s purchase of an existing building located in a QOZ, providing that the basis of the underlying land purchased with an existing building is not taken into account in determining whether such a building is deemed “substantially improved” in accordance with the regulations

A public hearing on the regulations is scheduled for January 10, 2019 at 10:00 a.m. in the IRS Auditorium in Washington, D.C.  In the meantime, you can review a full text of the IRS regulations and Revenue Ruling on its website. We will continue to provide updates as the regulations move toward adoption.

If you have any questions about the matters in this Legal Alert or any other legal issues, please contact the following attorneys, or the Harris Beach attorney with whom you usually work: Robert Murray at (716) 200-5180 / bmurray@harrisbeach.com; Pietra Zaffram at (716) 200-5112 / pzaffram@harrisbeach.com; Francis L. Gorman at (585) 419-8628 / flgorman@harrisbeach.com; Shawn Griffin at (585) 419-8614 / sgriffin@harrisbeach.com; Marybeth Orsini at (585) 419-8725 / morsini@harrisbeach.com; Kevin Bezio at (518) 701-2718 / kbezio@harrisbeach.com; Justin Miller at (518) 701-2710 / jmiller@harrisbeach.com;  Robert Ryan at (518) 701-2715 / rryan@harrisbeach.com;  Michael Curti at (914) 298-3026 / mcurti@harrisbeach.com; Thomas Garry at (516) 880-8489 /  tgarry@harrisbeach.com; and Andrew Komaromi at (516) 880-8385 / akomaromi@harrisbeach.com.

This alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, Melville, New York City, Rochester, Saratoga Springs, Syracuse, Uniondale and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.

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Content current as of March 23, 2023 8:25 pm