Real Estate Tax Alert: Anticipated Qualified Opportunity Zone Proposed Regulations are Released

On October 19, 2018, the IRS issued proposed regulations, a revenue ruling and an updated Q&A document providing guidance in applying the Qualified Opportunity Zone (QOZ) rules. The proposed regulations provide much needed guidance on how to apply the new QOZ rules and should allow investors to move forward with selling capital assets and rolling over the capital gain into Qualified Opportunity Funds (QOF).

Highlights

The Tax Cuts and Jobs Act created a new rule that allows investors to defer the recognition of capital gain by investing in a Qualified Opportunity Fund (QOF) that invests in Qualified Opportunity Zones (QOZ).

Once invested in a QOF, taxpayers must recognize the deferred gain on the earlier of the sale of its interest in the QOF or December 31, 2026. If the taxpayer holds its interest in the QOF for at least 5 years, then it will be entitled to permanently exclude 10% of its deferred gain. If its interest in the QOF is held for at least 7 years, then it will be entitled to permanently exclude an additional 5% of the deferred gain. Additionally, any future appreciation is permanently excluded if the taxpayer holds its interest in the QOF for at least 10 years.

The proposed regulations provide much needed guidance on how to apply the new QOZ rules and should allow investors to move forward with selling capital assets and rolling over the capital gain into QOFs.