For Opportunity Zones, When are 180 Days Up?

The IRS recently released the second tranche of proposed Opportunity Zone Regulations, which provides additional clarity on a number of issues for investors and businesses interested in the tax benefits of Opportunity Zones. Although the Opportunity Zone statute provides that taxpayers must invest their capital gain within 180 days from when the gains were realized, the proposed regulations include some additional wrinkles, which add complexity and opportunities for potential Opportunity Zone investors. 

Generally, a person must invest capital gain into a Qualified Opportunity Fund ("QOF") within 180 days of the sale or exchange giving rise to that gain. However, the proposed regulations offer two variations on this rule worth highlighting. 

First, the IRS provided flexibility for capital gains realized by partnerships and other pass-through entities. Specifically, a partnership may invest capital gains into a QOF within 180 days, and if such an investment is made, the gain is not reflected in the partners' income. However, if the partnership chooses not to invest qualifying capital gains into the QOF, the IRS has determined that a partner may invest the underlying capital gains generated from a partnership, and moreover the partner may either choose to start the 180-day period on the same day the partnership would have or at the end of the partnership's taxable year. This taxpayer-friendly provision could provide taxpayers who have gain from a partnership greater flexibility in identifying and making QOF investments. 

In contrast, the IRS recently limited the timeframe that capital gains from the sale or exchange of real or depreciable property used in a trade or business (known as Section 1231 gains) could be invested in a QOF. Specifically, the IRS issued guidance that the only gain arising from Section 1231 property eligible for Opportunity Zone treatment is the net capital gain for the taxable year, calculated by taking into account all capital gains and losses on Section 1231 property for the entire tax year. As a result, for a Section 1231 gain, the capital gain is only determinable at the end of the tax year, and the person has 180 days from the end of the tax year to invest into a QOF. Therefore, taxpayers who generate Section 1231 gain during a taxable year will not be able to invest such gains into a QOF until the end of a tax year to the extent they want to defer the taxability of the gains. 

While there are potentially significant tax benefits from opportunity zone investments, as illustrated above, there are complex and detailed rules that must be satisfied to help ensure taxpayers can take advantage of such benefits.

Please contact the Ice Miller Opportunity Zone Team with any questions you have with respect to OZ fund investments and operations or other OZ requirements.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.