The Internal Revenue Service has added more information on Opportunity Zones on its Opportunity Zones Frequently Asked Questions page. The new information provides guidance on the eligibility of capital gains in 2017, indicating they are eligible if invested in a Qualified Opportunity Fund within a 180-day period (at this point, only gains in late December would be eligible). Interested individuals and entities who have recognized capital gains in the last six months from the sale of stock, art, real estate or other investments should consult a tax adviser about establishing a Qualified Opportunity Fund, which is defined in Internal Revenue Code § 1400Z-2:
(d) Qualified opportunity fund
For purposes of this section-
(1) In general
The term “qualified opportunity fund” means any investment vehicle which is organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (other than another qualified opportunity fund) that holds at least 90 percent of its assets in qualified opportunity zone property, determined by the average of the percentage of qualified opportunity zone property held in the fund as measured-
(A) on the last day of the first 6-month period of the taxable year of the fund, and
(B) on the last day of the taxable year of the fund.
In addition, the FAQs page indicates that funds are self-certified and that the form should be released this summer:
Q. How does a taxpayer become certified as a Qualified Opportunity Fund?
A. To become a Qualified Opportunity Fund, an eligible taxpayer self certifies. (Thus, no approval or action by the IRS is required.) To self-certify, a taxpayer merely completes a form (which will be released in the summer of 2018) and attaches that form to the taxpayer’s federal income tax return for the taxable year. (The return must be filed timely, taking extensions into account.)
IRC § 1400Z-2 also defines “substantial improvement”:
(D) Qualified opportunity zone business property
(i) In general
The term “qualified opportunity zone business property” means tangible property used in a trade or business of the qualified opportunity fund if-
(I) such property was acquired by the qualified opportunity fund by purchase (as defined in section 179(d)(2)) after December 31, 2017,
(II) the original use of such property in the qualified opportunity zone commences with the qualified opportunity fund or the qualified opportunity fund substantially improves the property, and
(III) during substantially all of the qualified opportunity fund’s holding period for such property, substantially all of the use of such property was in a qualified opportunity zone.
(ii) Substantial improvement
For purposes of subparagraph (A)(ii), property shall be treated as substantially improved by the qualified opportunity fund only if, during any 30-month period beginning after the date of acquisition of such property, additions to basis with respect to such property in the hands of the qualified opportunity fund exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the qualified opportunity fund.
(iii) Related party
For purposes of subparagraph (A)(i), the related person rule of section 179(d)(2) shall be applied pursuant to paragraph (8) of this subsection in lieu of the application of such rule in section 179(d)(2)(A).
In addition, § 1400Z-2 provides information about other types of Qualified Opportunity Zone investments.
Qualified Opportunity Zones were created by the Tax Cuts and Jobs Act to stimulate economic development by spurring investment in distressed communities and providing tax benefits to investors. In April, the U.S. Department of the Treasury and the IRS designated Opportunity Zones in 18 states, including several in Ohio. For more information, please see our previous alert.