Below are a detailed list of rules, regulations, and requirements applicable to the opportunity zone program and opportunity fund investing.
For The Investor
Eligible Capital Gains
Eligible Capital Gains for investment into the Opportunity Zone Fund include gains recognizable from taxable sales such as: the sale of stocks or bonds, the sale of a property, or the sale of an interest in a partnership.
Long term, short term, and net Section 1231 Capital Gains can be invested into an Opportunity Zone Fund.
Any depreciation recapture taxed as ordinary income under Secs. 1245 and 1250 is not eligible gain.
Gains taxed as ordinary income and gains from certain derivative contracts are not eligible for qualifying investment.
Only investors with qualifying Capital Gains are eligible for Opportunity Fund tax benefits.
Only NET Section 1231 gain taxed as capital gain may be reinvested in an Opportunity Fund. The 180-day period begins on the last day of the tax year. This prolongs the allowable reinvestment period.
Taxpayers that realize eligible gain for federal tax purposes may elect to defer that gain. These taxpayers include individuals, C corporations (including regulated investment companies and real estate investment trusts), partnerships, S corporations, trusts and estates.
If a partnership, S corporation, trust or estate recognizes capital gain, it can choose to invest in a QOF and defer. If the entity doesn't, the partners or shareholders can elect to defer by reinvesting the gain allocated to them. For these purposes, the 180-day window beings on the last day of the partnership's tax year.
A taxpayer that wishes to defer eligible gain must reinvest the gain into a QOF within 180 days from the date of the sale or exchange that gives rise to the gain. The 180-day period generally begins on the day on which the gain would be recognized for federal income tax purposes if the taxpayer did not elect under Sec. 1400Z-2 to defer recognition of the gain.
Investor generally must make an election to defer gain in the tax return for the year of the Capital Gains, they are solely responsible for ensuring eligibility and qualification in each individual circumstances.
A taxpayer must affirmatively elect to defer eligible gain. The election is made on Form 8949, Sales and Other Dispositions of Capital Assets, by reporting the eligible gain as a positive number before then removing the gain on a separate line as a negative adjustment.
A taxpayer is not required to reinvest the entire proceeds from the sale or exchange giving rise to the eligible gain; rather, to defer the full amount of eligible gain, the taxpayer must reinvest only the gain amount. Thus, unlike a Sec. 1031 exchange, a taxpayer reinvesting in a QOF can both take cash off the table and defer the full amount of gain resulting from a sale.
A taxpayer may elect to defer some or all of an eligible gain that is reinvested within the applicable 180-day period. The entire amount of the gain need not be reinvested at once; rather, a taxpayer may make multiple deferral elections related to the same gain but may make a deferral election with respect to the same portion of any eligible gain only once.
If a taxpayer invests more than the eligible gain amount into a QOF - or invests eligible gain but elects to defer only a portion of that eligible gain - the taxpayer is treated as having made two separate investments. The first represents only the investment of eligible gain for which a deferral election has been made. The second consists of all other amounts.
For The Opportunity Fund
A taxpayer may defer eligible gain only if, within 180 days of the sale or exchange, some or all of the gain is reinvested into a QOF. A QOF is a special-purpose entity that effectively acts as a conduit, achieving the policy goal of ensuring that invested capital is ultimately employed in a business located within a QOZ.
A QOF may be organized as a corporation or partnership and may be newly formed or a preexisting entity. A QOF does not need to be located within a QOF, but it must be created and organized in one of the 50 states, the District of Columbia, or a U.S. possession.
A QOF must self-certify that it is a QOF by filling Form 8996, Qualified Opportunity Fund, with its tax return for each year the entity intends to oprate as a QOF. In the first tax year the entity intends to oprate as a QOF, the entity has the option of specifying the first month it wants to be a QOF.
A taxpayer that wishes to defer eligible gain must acquire membership or an equity interest in a QOF. For these purposes, an equity interest includes preferred stock in a corporation or a partnership interest with special allocations but does not include any debt instrument. In general, a taxpayer is free to use an interest in a QOF as collateral for a loan.
A taxpayer that elects to defer gain by reinvesting that gain into a QOF takes a basis in the QOF interest of zero. If a taxpayer invests money in a QOF and does not make an election to defer eligible gain with respect to that investment - or if the taxpayer invests more than the eligible gain amount into a QOF - this investment is treated as a separate investment in the QOF, and the taxpayer's basis in that investment in teh QOF is determined under general tax principles. Only investments attributable to deferred gains are eligible for the five-, seven-, and 10-year holding period exclusion provisions.
A QOF must hold at least 90% of its assets in QOZ property (the "90% test"), determined by the average of the percentage of QOZ property held in the fund, as measured on: 1. The last day of the first six-month period of the tax year of the QOF, and 2. The last day of the tax year of the fund.
Opportunity Zone Investment Guide
Learn about our offering and get an
overview of the Opportunity Zone Program with this guide.
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