Updates to Opportunity Zone Deferrals

Updates to Opportunity Zone Deferrals

As you may have learned in a previous blog, there is a brand new section of the Tax Cuts & Jobs Act called “Opportunity Zone”. As with many of the newer items in TCJA, the IRS is releasing clarifications and updates.  This blog covers a recent update regarding the deferral of gains for investment in a Qualified Opportunity Fund (QO Fund).

Remind Me – What Is The Opportunity Zone?

Designed to spur development in economically distressed areas, the Opportunity Zone provides tax benefits to investors. An investor who sells an asset that generates a capital gain can invest the money into an Opportunity Fund. The gain is deferred and/or reduced, depending on the amount of time you leave it invested.

Click here for a quick guide to help you understand the process & benefits.

Got It – So What’s New?

The update from the IRS clarifies what is considered to be a qualified opportunity fund. Qualified opportunity zone business property is tangible property used in a trade or business of the QO Fund if the property was purchased after Dec. 31, 2017.

The guidance permits tangible property acquired after Dec. 31, 2017, under a market rate lease to qualify as “qualified opportunity zone business property” if during substantially all of the holding period of the property, substantially all of the use of the property was in a qualified opportunity zone.

A key part of the guidance clarifies the “substantially all” requirements for the holding period and use of the tangible business property:

  • For use of the property, at least 70% of the property must be used in a qualified opportunity zone.
  • For the holding period, tangible property must be qualified opportunity zone business property for at least 90% of the QO Fund’s or qualified opportunity zone business’s holding period.
  • The partnership or corporation must be a qualified opportunity zone business for at least 90% of the QO Fund’s holding period.

Clarification on Transfers & Inherited Opportunity Funds

There are situations where deferred gains may become taxable if an investor transfers their interest in a QO Fund.

For example, if the transfer is done by gift, the deferred gain may become taxable. However, inheritance by a surviving spouse is not a taxable transfer. Nor is a transfer, upon death, of an ownership interest in a QO Fund to an estate or a revocable trust that becomes irrevocable upon death.

Please set up a meeting with your hb&k advisor if you think you would like to take advantage of this new tax saving opportunity!