7824 / Can IRC Section 1231 capital gain income be deferred under the opportunity zone rules?

The second round of regulations regarding opportunity zone (OZ) investments generated questions as to the treatment of IRC Section 1231 gains that had been invested in a qualified opportunity zone fund (QOF). Section 1231 capital gain treatment generally applies to depreciable property and real property used in a business (but not land held as investment property). This gain is generally treated as long-term capital gain.

Generally, under the proposed regulations, Section 1231 capital gains are treated differently, and are only permissible QOF investments to the extent of the 1231 capital gain amount, if the investment is made within 180 days of the last day of the tax year. Therefore, taxpayers may elect to defer their Section 1231 long-term capital gain by rolling the gain amount into a QOF during the 180-day period beginning with the last day of the taxpayer’s tax year.¹

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Planning Point: IRS FAQs provided relief for the 2018 tax year, so that investment in the OZ fund and deferral was available for the gross amount of Section 1231 gain realized during the 2018 tax year if the investment was made within 180 days of the sale date, rather than the last day of the tax year (assuming that the taxpayer’s tax year ended before May 1, 2019, when the regulations were released).

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