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BP Blast: Opportunity Zone Guidance – Part Deux

Taxes were due April 15th, the IRS gave us a day off on the 16th, and then on the 17th they delivered the much anticipated second round of guidance on Opportunity Zones. If you don’t know what Opportunity Zones are, start by reading our primer on them here.

This second round of guidance provides significant clarity with respect to operating businesses, and will allow investors to move forward with certainty on their qualification for future tax benefits. Expect to see more funds that target non-real estate businesses for investment.

Of significant note, the 180-day clock for reinvestment of Sec. 1231 gains, the kind generated when anything used in a trade or business is sold (think rental real estate), does not start until the end of the tax year. All Sec. 1231 gains and losses need to be netted at the end of the year in order to determine if there is a net gain (treated as a capital gain and therefore eligible for Opportunity Zone deferral) or a net loss (treated as an ordinary loss, not eligible for Opportunity Zone deferral). I can understand the IRS rationale here, as taxpayers won’t know if they have an eligible gain until the end of the tax year, but it does lead to some interesting results. Imagine if someone sold a building on January 1 of 2019 for a $3,000,000 Sec. 1231 gain. The 180-day clock for reinvestment does not start until December 31 of 2019, so they would have to sit on the cash from the gain for a full year before being eligible to reinvest into a Qualified Opportunity Fund.

Also, there are two very taxpayer-friendly items that we need to highlight. First, partnership distributions, to the extent that they do not exceed an investor’s basis in their Opportunity Zone investment, are allowed. This includes refinance distributions, with the caveat that all distributions will be looked at under the Sec. 707 disguised sale rules.   Second, the new regulations allow qualifying Opportunity Zone investors to exclude the gain on sale of underlying assets from tax. This is a HUGE change from the original guidance where an investor had to sell their equity ownership in the Opportunity Zone fund in order to take advantage of the tax benefits.

It’s not all sunshine and puppies though, the IRS did state that Qualified Opportunity Funds do not allow tax-free “recycling” of money. That is, if a fund bought qualifying Opportunity Zone property in year one, sold it in year five for a $2,000,000 gain, and immediately reinvested the full proceeds in other qualifying Opportunity Zone property, the $2,000,000 gain is still subject to tax.

This is just the tip of the iceberg. These new regulations are 169 pages long and cover many additional items. Keep your eyes peeled for additional information and guidance from Berntson Porter, your trusted advisor.

If you have questions about Opportunity Zones, please reach out to Brendan McAuliffe, CPA at We’re here to help!


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