Submitted by Colleen Campbell, ERCGP Intern
Section 1231 Assets (defined in Section 1231 of the Internal Revenue Code) are depreciable property that is held and used in a trade or business for more than one year. Capital gains from the sale of this kind of asset are taxed at a lower rate than the traditional income tax rate. Capital gains from the sale of Section 1231 Assets may be invested in a Qualified Opportunity Fund (QOF).
A “netting” process is employed to determine the aggregate value of capital gains and losses resulting from the sale of Section 1231 Assets. The total capital gain from sales are taxed accordingly, and total losses from the sale of Section 1231 Assets are deducted from taxes as ordinary losses. The 2019 Proposed Opportunity Zone legislation permitted investors to defer only “capital gain net income” by investing in a QOF. In other words, the legislation required taxpayer’s to wait until the end of the tax year when total losses and gains had been aggregated before investing in a QOF.
However, after comments on the proposal expressed concern over this provision, the U.S. Treasury Department and Internal Revenue Service changed their position in the final regulations and withdrew this requirement. Under the updated legislation, taxpayers may immediately invest and defer Section 1231 gains after they are earned from the sale of a property. Each gain from the sale of a Section 1231 Asset is calculated independently, and is not impacted by losses on other sales. Taxpayers must invest within 180 days from the sale of the asset to qualify for deferment.