Final OZ regulations make time-sensitive changes for investing 1231 gains

On Dec. 19, 2019, the Department of Treasury released highly anticipated final regulations covering the opportunity zones program. The final regulations combine two sets of proposed regulations published in October 2018 and May 2019 into one comprehensive package, and the finalized rules feature many taxpayer- and investor-friendly changes from those initially proposed. For additional background and details regarding opportunity zones and the proposed regulations.

This alert focuses on the changes made to a taxpayer’s ability to invest gains on sales of section 1231 property (property used in a trade or business) in a qualified opportunity fund (QOF), which are of time-sensitive significance. It is critical to note that the following have the potential to dramatically alter the amount and timing in which a taxpayer can invest in a QOF in exchange for the program’s tax benefits in 2019.

1. A taxpayer’s gain from a singular sale of section 1231 property (“1231 property”) is now eligible to be invested into a QOF. Under the proposed regulations, only the taxpayer’s net gain on all 1231 property sales for the taxable year could be invested;
2. A taxpayer now has 180 days from the date 1231 property is sold to invest in a QOF, whereas under the proposed regulations the 180-day period for investing net section 1231 gains began on the last day of the taxpayer’s taxable year; and
3. A taxpayer’s eligible section 1231 gain (“1231 gain”) amount is no longer required to be reduced by any losses from 1231 property sales incurred in the previous five years.

The additional flexibility and opportunity these changes provide to potential investors is best illustrated via an example.

Consider a calendar-year taxpayer who in July 2019 sold 1231 property at a gain of $100 and in December 2019, sold an additional 1231 property at a loss of $25. During 2017, the taxpayer had sold 1231 property at a loss of $50.

Under the May 2019 proposed regulations