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IRS issues more guidance on investor tax breaks in opportunity funds

IRS issues Q&A, providing more certainty for investors in how, when and what opportunity zone investments are eligible for tax breaks.  

Along with the Tax Cuts and Jobs Act of 2017 (TCJA) came some generous tax breaks to encourage investment in economically underserved markets. Until now, though, the rules for claiming the tax breaks on these investments were unclear.

On April 17, the IRS and U.S. Treasury issued proposed guidance (PDF), providing much needed clarity on how to proceed with greater confidence. These proposed regulations provide details on forming and existing funds with related credits intact.

Opportunity zone funds are expected to increase investments in economically distressed communities. The TCJA program provides tax breaks for investments within the nearly 9,000 low-income communities have been designated as qualified opportunity zones.

How tax breaks work

According to the IRS, the proposed regulations allow the deferral of all or part of a gain that is invested into a qualified opportunity fund (OZ fund) that would otherwise be included in income. The gain is deferred until the investment is sold or exchanged or on Dec. 31, 2026, whichever comes first. If the investment is held for at least 10 years, investors may be able to permanently exclude gains from the sale or exchange of an investment in an OZ fund.

The proposed guidance defines the “substantially all” test found in various places in the statute (section 1400Z2) as a measure of eligibility.

  • “Substantially all” in the use of tangible business property is at least 70 percent.
  • “Substantially all” in the holding period context is defined as 90 percent.

For details, see the guidance (PDF) on IRS.gov. Contact your Wambolt advisor to discuss questions regarding opportunity zone fund investments.

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