26 U.S.C. § 1400Z–2 — Special rules for capital gains invested in opportunity zones

(a) In general. (1) If a taxpayer^* sells or exchanges property to an unrelated person at a gain, the taxpayer may elect to leave out of gross income the part of the gain no greater than the total amount the taxpayer invests in a qualified opportunity fund^* during the 180-day period beginning on the sale or exchange date. The excluded gain must later be included as subsection (b) provides, and subsection (c) applies. (2) The taxpayer may not make a second election for the same sale or exchange while an earlier election is in effect, and may not elect for a sale or exchange after December 31, 2026.

(b) Deferral of gain invested in opportunity-zone property. (1) The deferred gain is included in income in the year containing the earlier of the date the investment is sold or exchanged or December 31, 2026. (2)(A) The amount included is the excess of the lesser of the excluded gain or the investment’s fair market value on that date over the taxpayer’s basis in the investment. (B) Unless this clause or subsection (c) provides otherwise, basis is zero. Basis increases by gain recognized under subsection (a)(1)(B). If the investment is held at least five years, basis also increases by 10 percent of the deferred gain. If held at least seven years, it increases by another 5 percent of the deferred gain.

(c) Special rule for investments held for at least 10 years. If the taxpayer holds the investment at least 10 years and makes the required election, the property’s basis equals its fair market value when sold or exchanged.

(d) Qualified opportunity fund. (1) A “qualified opportunity fund” is a corporation^* or partnership^* organized to invest in qualified opportunity-zone property, other than another such fund, that holds at least 90 percent of its assets in that property. The percentage is the average of the percentage held on the last day of the fund’s first six-month tax-year period and the last day of the tax year. (2)(A) “Qualified opportunity-zone property” is qualified opportunity-zone stock^*, a qualified opportunity-zone partnership interest, or qualified opportunity-zone business property. (B) Stock qualifies if a domestic corporation issues it after December 31, 2017, directly or through an underwriter, to the fund solely for cash; the corporation is or is being organized as a qualified opportunity-zone business when issued; and it remains such a business for substantially all of the fund’s holding period. A rule like section 1202(c)(3) applies to redemptions. (C) A partnership interest qualifies if it is a domestic partnership capital or profits interest acquired by the fund after December 31, 2017, solely for cash; the partnership is or is being organized as a qualified opportunity-zone business when acquired; and it remains such a business for substantially all of the fund’s holding period. (D)(i) Business property is tangible property used in the fund’s trade or business^* that the fund bought after December 31, 2017; whose original use in the zone begins with the fund or which the fund substantially improves; and substantially all of whose use during substantially all of the fund’s holding period is in a qualified opportunity zone^*. (ii) Property is substantially improved only if, during the 30 months after acquisition, additions to basis exceed the property’s adjusted basis at the start of that period; for property in a zone made entirely of rural area, the required amount is 50 percent of that adjusted basis. (iii) The related-person rule in section 179(d)(2) applies under paragraph (8) instead of section 179(d)(2)(A). (3)(A) A qualified opportunity-zone business is a trade or business in which substantially all tangible property owned or leased is qualifying business property, that meets section 1397C(b)(2), (4), and (8), and that is not described in section 144(c)(6)(B). (B) Property that stops qualifying remains treated as qualifying for the shorter of five years after it stops qualifying or the date the business no longer holds it.

(e) Applicable rules. (1) An investment in a fund containing both elected gain and other amounts is treated as two investments: one containing the elected amounts and one containing the other amounts. Subsections (a), (b), and (c) apply only to the first. (2) People are related if section 267(b) or 707(b)(1) describes them, substituting 20 percent for 50 percent each time. (3) For a decedent, amounts recognized under this section that are not properly included in the decedent’s income are included as section 691 provides. (4) The Secretary^* must issue needed or appropriate regulations, including certification rules for funds, reasonable reinvestment periods for returned capital and sale proceeds, and anti-abuse rules.

(f) Failure of fund to maintain investment standard. (1) If a fund fails the 90-percent test, it pays a penalty for each month of failure. The penalty is the excess of 90 percent of total assets over the amount of qualifying property, multiplied by the section 6621(a)(2) underpayment rate for that month. (2) For a partnership fund, the penalty is allocated proportionally among the partners as part of their distributive shares^*. (3) No penalty applies if the failure was due to reasonable cause.