The IRS has recently issued final regulations regarding details about investment in qualified opportunity zones (QOZ). The regulations modified and finalized proposed regulations for QOZ businesses that IRS previously issued.
The final regulations provide additional guidance for taxpayers who are eligible to make an election to temporarily defer the inclusion in gross income of certain eligible gain. The final regulations also address the ability of such taxpayers’ eligibility to increase the basis in their qualifying investment equal to the fair market value of the investment on the date that it is sold, after holding the equity interest for at least 10 years.
Here’s what it means for taxpayers investing in qualified opportunity zones:
The statute permits the deferral of all or part of a gain that would otherwise be included in income if corresponding amounts are invested into a Qualified Opportunity Fund (QOF). The gain is deferred until an inclusion event or Dec. 31, 2026, whichever is earlier.
Furthermore, the final regulations provide a list of inclusion events and provide guidance that allows taxpayers to determine the amount of income that must be included at the time of the inclusion event or December 31, 2026.
The regulations also address the various requirements that must be met to qualify as a QOF, as well as the requirements that an entity must meet to qualify as a QOZ business. Specifically, the regulations address how an entity becomes a QOF or QOZ business and the rules regarding the requirement that a QOF or QOZ business engage in a trade or business.
The final regulations also retain the general approach of the proposed regulations while providing additional guidance and clarification regarding the rules regarding QOZ business property.
Related forms, instructions, and other information taxpayers need to take advantage of this update are now available. For more information about this and other TCJA provisions, please contact us for assistance.