Will The Opportunity Zone Guidance Affect Your Deal?

The final guidance on the opportunity zone legislation has been released, and it was good news for opportunity zone investors, particularly in terms of timing. The new regulations allow for more flexibility in timing than investors originally thought. The final document was more than 500 pages of guidance clarifying the timing questions for the investment and formation of an opportunity zone fund.

“The final regulations provide that gains associated with depreciable property used in a trade or business, which are referred to as Section 1231 Gains can be invested within the 180-day period after the asset is disposed of.  Under the proposed regulations, the 180-day period for investing these gains began on December 31 of each tax year,” Phil Jelsma, a partner and chair of the tax practice team at Crosbie Gliner Schiffman Southard & Swanson, tells GlobeSt.com. “In addition, the final regulations allow the investor to place the total or gross amount of the Section 1231 Gains without having to later reduce it by 1231 Losses.”

The guidance also allows for flexibility in the formation of a qualified opportunity zone. “The IRS recognized that often these decisions are based on information provided by partnerships, LLCs and S corporations through Schedule K-1s,” says Jelsma. “If this information is not received timely, it is difficult for the investor to make clear decisions.  As a result, many investors are unsure what to do until they receive their Schedule K-1s.  The final regulations give partners, members and S corporation shareholders up to 180 days from the due date of the entity’s tax return, typically March 15, to make an investment in a QOF.”

Finally, the new guidance also allows for installment sales to be invested after the date of payment. “From a timing perspective, the final regulations provide that amounts received over time which are typically taxed as installment sales can be invested either 180 days from the date of the receipt of a payment or 180 days from the end of the taxpayer’s tax year in which the payment is received,” says Jelsma. “These rules apply even if the asset was disposed of before the effective date of the Opportunity Zone rules, December 2017. This allows a great deal more flexibility particularly for taxpayers that have failed Section 1031 exchanges from 2018 who received cash in 2019 since they now have until June 28, 2020 to invest in an Opportunity Zone and defer their 2019 tax liabilities.”

This guidance will certainly impact the opportunity zone investment and could even impact those with projects already underway. “We are seeing a number of clients who thought that they might need to meet a more stringent either asset by asset substantial improvement rule and the final regulations now allow that certain purchases of tangible personal property used in the same business which improve the functionality of the property to be included in the substantial improvement test,” says Jelsma. “The regulations include an example with a hotel with a million-dollar tax cost or basis where the QOF spends $900,000 on rehabilitation and $110,000 on mattresses, furniture, gym equipment and restaurant equipment and it satisfies the substantial improvement test.”