After the IRS published regulations in May 2019 with more detailed rules on opportunity zone deadlines, it became apparent that some taxpayers who had invested before the regs were released may lose their gain deferral. The proposed regulations established that the 180-day period for investing capital gains in a Qualified Opportunity Fund (QOF) begins on the last day of the tax year. Also, any Section 1231 gain must be netted against any capital losses at the end of the tax year before the amount of the QOF investment is determined. So, what happens if you invested early and failed to net your investments?
Applying the proposed rules, an investor who put money into a QOF before the end of 2018 may have run afoul of the netting rules. Also, the 180-day period for deferral in 2018 began at the end of the year, on December 31, 2018, so an early investor would be outside that window. The IRS addressed these nonconforming 2018 investments in a new FAQ on its website, giving taxpayers special relief in this situation and permitting them to still defer their capital gains. Here is the IRS’s question and answer:
Q: Before the last day of my 2018 tax year but during the 180 days beginning with the realization of a section 1231 gain, I invested the amount of that section 1231 gain into a QOF. The amount that I invested was less than my 2018 net section 1231 gain. Can I make a valid deferral election based on that investment, even though proposed regulations say that the 180-day period for my net section 1231 gain began on December 31, 2018?
A: Yes. Under these facts, because your tax year ended before May 1, 2019, your QOF investment can support a valid deferral election. Making that election will not impair your ability consistently to rely on all other aspects of proposed regulations published on May 1, 2019.
It is important to note that the scenario in the FAQ involves a taxpayer whose tax year ended before May 1, 2019, the date the regulations were published. Taxpayers with different factual situations may not fit the IRS’s criteria for 2018 investment relief, so it is best to consult with your tax advisor to see if you can get retroactive approval of your gain deferral.
Opportunity Zone Slideshow Available
The Congressional Joint Committee on Taxation has taken the unusual step of posting a 47-page slide show giving an overview of the Qualified Opportunity Zone rules. The file contains interesting graphics, tables, and flow charts illustrating different aspects of the rules and showing the qualified regions for investment. The Joint Committee on Taxation is a nonpartisan committee made up of members of both the House and Senate tax-writing committees and its staff provides expert analyses of U.S. tax legislation.