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On Wednesday, April 17, 2019, the Treasury Department and the Internal Revenue Service issued a broad, investment-friendly second set of Proposed Regulations (the “Proposed Regulations”) regarding “Qualified Opportunity Zones” (“QOZs”) and “Qualified Opportunity Funds” formed to invest in QOZs (“QOFs”). The first set of Proposed Regulations (the “Prior Proposed Regulations”), issued on October 19, 2018, contained helpful guidance but left numerous lingering issues and unanswered questions. The Proposed Regulations expand and modify the Prior Proposed Regulations in numerous ways that provide relief to QOFs and their investors and clarify the manner in which QOFs may be structured. The changes reflected in the Proposed Regulations are in most cases very favorable to investors and appear to reflect a desire by the government to facilitate broad investment in QOFs by eligible investors. This note provides a detailed analysis of the most important clarifications and changes made by the Proposed Regulations, specifically focusing on those changes that will make it easier for investment vehicles to qualify as QOFs and for investors to make qualifying investments in QOFs.
Overview of Tax Benefits
A “qualifying investment” in a QOF is an equity interest in a QOF that has been acquired for cash (or property, subject to certain limitations) with respect to which the investor has made an election to defer eligible capital gain that would otherwise be recognized no more than 180 days before the day the interest in the QOF was acquired. An eligible investor may obtain three types of federal income tax benefits as a result of its qualifying investment in a QOF:
Sale of Interests in a QOF Partnership Does Not Trigger Depreciation Recapture or Other Ordinary Income Items
The Proposed Regulations clarify that, if an investor in a QOF that is taxed as a partnership (i.e., a QOF partnership) makes the FMV Basis Election upon its sale of QOF interests after 10 years:
The effect of these rules is to eliminate any gain upon the investor’s sale or exchange of a qualifying investment after a 10-year holding period, regardless of whether the investor has used net losses allocated by the QOF partnership and whether the investor has received substantial leveraged distributions from the QOF partnership. These rules also avoid the creation of offsetting capital losses and ordinary income items under the technical partnership tax rules. (The consequences of an investor’s election to eliminate certain capital gains of a QOF partnership or QOF REIT that are realized after the investor has held a qualifying investment for at least 10 years are discussed below.)
Carried Interests Issued by a QOF Do Not Qualify for QOZ Benefits
Where a person receives an interest in a QOF in exchange for services rendered to the QOF or to an entity in which the QOF holds any direct or indirect equity interest, the Proposed Regulations provide that the portion of such person’s QOF interest received in exchange for such services is not treated as a qualifying investment. Thus, a profits interest in a QOF that is acquired for such services (a “carried interest”) is not eligible for QOZ benefits. Furthermore, a capital interest acquired in exchange for such services is also ineligible for QOZ benefits. Thus, generally speaking, only the investment of eligible gain gives rise to QOZ benefits. We note, however, that a fund manager may be allowed to benefit from an FMV Basis Election made by an upper-tier partnership in which the fund manager owns a carried interest, to the extent that such partnership holds qualifying investments in a QOF for more than 10 years and, through such election, eliminates gain that is allocable to the fund manager.
QOF Interests Acquired for Cash or Property from Their Current Holder Qualify for QOZ Benefits
If an investor acquires an equity interest in a QOF on or before December 31, 2026, in a secondary market transaction (that is, for cash or property from another investor in the QOF rather than from the QOF directly), such interest may be a qualifying investment if the investor has recent, eligible gain that can be deferred at that time.
Partnership Refinancing Distributions Generally Tax-Free After Two Years
Prior to the Proposed Regulations, it was unclear whether a QOF partnership could distribute debt proceeds to its owners without triggering the recognition of gain by such investors. The Proposed Regulations clarify that a distribution of cash by a QOF partnership to its investors generally does not trigger gain to the extent the distribution does not exceed the investors’ bases in the QOF (including taking into account any increase in their bases attributable to the QOF’s debt).
However, any distribution of cash or property will disqualify an investor’s original transfer to the QOF partnership from beneficial QOZ treatment to the extent the overall transaction would be recharacterized as a disguised sale if the cash contributed to the QOF partnership had been non-cash property and the exception from disguised sale treatment for certain debt-financed distributions were ignored. Ordinarily, disguised sale treatment would be presumed for distributions made within two years of the contribution, and no disguised sale treatment would be presumed for distributions made more than two years after the contribution. Thus, it appears that distributions by a QOF partnership to its partners that are (i) made more than two years after the investors’ contributions to the QOF, and (ii) do not exceed the investors’ bases in their QOF interests generally would not trigger gain or otherwise disqualify the investors’ interests. Nevertheless, consideration should be given as to whether the facts and circumstances of any such distribution (e.g., where the distribution is certain to be made) could disqualify the investors’ qualifying investment even where such distribution is made more than two years after the investors’ contributions.
A refinancing distribution by a QOF corporation (including a QOF REIT) generally will be taxable to a shareholder in the QOF to the extent the distribution exceeds the shareholder’s basis in its shares of the QOF. However, because a shareholder’s basis in its shares is not increased by its share of the QOF corporation’s debt, and the shareholder’s basis in its qualifying QOF shares is zero until increased by the QOZ rules upon the fifth and seventh anniversaries of investment and on December 31, 2026, a QOF REIT (or other QOF corporation) may have less flexibility to make tax-free distributions of refinancing proceeds than a comparable QOF partnership.
Investors in QOF Partnerships and REITs Who Have a Holding Period in Excess of 10 Years Now Allowed to Benefit from the 10-Year Gain Elimination Provision Even Where QOF Sells Underlying Properties
Prior to the issuance of the Proposed Regulations, one of the most challenging structuring issues facing QOFs related to the fact that, under the statute and the Prior Proposed Regulations, the ability of QOF investors to eliminate gain after their 10-year holding period appeared to be available only upon a sale of interests in the QOF (rather than upon a sale by the QOF of its underlying assets).
The Proposed Regulations provide critical relief regarding this structuring point by allowing an investor in a QOF partnership interest to elect to exclude from gross income its allocable share (to the extent attributable to such investor’s qualifying investment) of the capital gain from the disposition of QOZ property by the QOF partnership that is reported on a Schedule K-1, provided that the disposition occurs after the investor has a 10-year holding period in its qualifying partnership interest. A similar election is available to shareholders of a QOF REIT with respect to capital gain dividends of the REIT attributable to a sale or exchange of QOZ property by the REIT after the 10-year holding period for the shareholder has been achieved.
In each case, however, the election to exclude amounts from gross income applies only to capital gains (including capital gains typically subject to a higher rate of tax, including unrecaptured section 1250 gains) allocated or distributed to the QOF investor, and not to amounts properly characterized as ordinary income (such as depreciation recapture treated as ordinary income under section 1245). In contrast, a disposition of a qualifying investment in a QOF by an investor with a 10-year holding period should eliminate all of the income and gain associated with such investment, even amounts that would otherwise be taxable as ordinary income. It is unclear whether this distinction was intended. Nevertheless, unless the provisions are amended, a direct disposition by the investor of its qualifying investment in the QOF after 10 years may be more advantageous to the investor (by virtue of eliminating any ordinary income) than a sale by the QOF of its underlying assets.
It is important to note that this election applies only to gain from certain dispositions of QOZ property by the QOF itself, and does not technically apply to gain recognized by a QOZ business (a “QOZB”) held by the QOF. It is unclear whether this distinction was intended.
Events That Trigger Inclusion of Deferred Gain
The statute provides that the amount of gain that is deferred with respect to a qualifying investment generally must be included in the investor’s income in the taxable year that includes the earlier of (A) the date on which the qualifying investment is sold or exchanged, or (B) December 31, 2026. The Proposed Regulations interpret the phrase “sold or exchanged” in an expansive manner generally to include any transaction that reduces the investor’s equity interest, including:
However, a tax-free contribution of a qualifying investment to a partnership (governed by section 721) is generally not an inclusion event, provided there is no reduction in the amount of the remaining deferred gain that would be recognized by the transferring partner on a later inclusion event (such as a later sale by such partner of the interest in the partnership it acquired).
Overview of the 90-Percent Asset Test
In order to qualify as a QOF, an entity must hold at least 90 percent of its assets in “QOZ property,” which is defined to mean QOZ business property, QOZ stock and QOZ partnership interests. This test (the “90-Percent Asset Test”) is applied by taking the average of the percentage of QOZ property held by the QOF (1) on the last day of the first six-month period of the taxable year of the QOF and (2) on the last day of the taxable year of the QOF.
Cash or Cash Equivalents Are Ignored for 6 Months After Investment
The Proposed Regulations helpfully allow a QOF to apply the 90-percent asset test on any testing date without taking into account any cash or cash equivalents received by the QOF in the preceding 6 months as a contribution to capital to the extent such assets are held by the QOF in the form of cash, cash equivalents or short-term debt instruments. This relief provision will alleviate the need for QOFs to deploy contributed cash quickly into QOZ property.
Sales Proceeds Reinvested by a QOF Within 12 Months Do Not Affect QOF Qualification
The statute authorized regulations that would allow a QOF a reasonable period of time to reinvest proceeds received from the sale or disposition of QOZ property. The Proposed Regulations provide that (i) proceeds received by a QOF from the sale or disposition of QOZ business property or an interest in a QOZB and (ii) amounts distributed to the QOF as a return of capital from a QOZB are treated as QOZ property for purposes of the 90-percent asset test so long as:
The Proposed Regulations further extend the 12-month reinvestment period if and to the extent the failure to meet the 12-month deadline is attributable to a delay in government action.
Unfortunately, the 12-month relief provision by its terms applies only to dispositions of property by a QOF and does not technically apply to dispositions of property by a QOZB held by the QOF, although the government has requested comments on whether relief should be provided with respect to QOZB dispositions.
Further, notwithstanding this 12-month relief provision, the Proposed Regulations do not shield the QOF and its investors from the tax consequences stemming from interim direct or indirect dispositions of property by a QOF even where the proceeds from such dispositions are reinvested within that timeframe. The government in the preamble to the Proposed Regulations (the “Preamble”) expressed concern regarding whether it had regulatory authority to prescribe rules for QOFs departing from the otherwise operative provisions concerning the recognition of such gain. (Of course, a QOF investor that is otherwise taxable on such interim gain could benefit from further deferral by investing in another QOF if such investment is made by December 31, 2026, although such an investment would not benefit from the investor’s holding period in the QOF recognizing the gain.)
Thus, the effect of the Proposed Regulations is to clarify that an interim sale where the proceeds are reinvested by the QOF according to the requirements set forth in the regulations (i) does not jeopardize the QOF’s satisfaction of the 90-percent asset test, (ii) does not cause the recognition of deferred gain by investors in the QOF and (iii) does not affect the holding period of such investors in their qualifying investments, but otherwise, the usual tax consequences of such a sale still apply to the QOF and its investors.
As stated above, a QOF must hold at least 90 percent of its assets in “QOZ property” (i.e., QOZ business property, QOZ stock or QOZ partnership interests). Equity interests constitute QOZ stock or QOZ partnership interests only if the underlying corporation or partnership is a QOZB. From a practical perspective, in a typical QOF structure the principal assets of the QOF will be QOZ partnership interests in one or more partnerships structured to qualify as QOZBs. Thus, the qualification of each partnership whose interests are owned by a QOF as a QOZB generally will be critical to satisfying the 90-percent asset test.
An entity is a “QOZB” only if, among other requirements:
As described below, the Proposed Regulations provide a number of beneficial clarifications and changes regarding these requirements.
QOZ Business Property Requirement
Overview of QOZ Business Property Definition
QOZ business property is defined by the statute as tangible property used in a trade or business of a QOF if:
For purposes of determining whether an entity qualifies as a QOZB, the criteria of the QOZ business property definition are applied to each asset of the entity as if the definition referred to QOZBs instead of QOFs.
Used Tangible Property Acquired by Purchase Treated as Original Use Property If Never Previously Used in the QOZ
The Proposed Regulations generally provide that the “original use” of tangible property acquired by purchase commences on the date when the acquirer first places the property “in service” in the QOZ, as determined for purposes of depreciation or amortization. The Proposed Regulations further provide that used tangible property will nevertheless satisfy the original use requirement with respect to a QOZ, so long as the property has not been previously used within that QOZ by any person.
Abandoned Property Treated as Original Use Property If Unused or Vacant for at Least 5 Years
The Proposed Regulations provide that where a building or other structure has been vacant (or movable property has been unused) for at least 5 years prior to being purchased by a QOF or QOZB, the vacant or unused asset will satisfy the original use requirement once placed in service again in a QOZ, as determined for purposes of depreciation or amortization. In other words, property that has been vacant for at least 5 years may be treated as QOZ business property even if the QOF or QOZB fails to meet the requirements for substantial improvement of such property.
Improvements to Leased Property Qualify as Original Use Property
The Proposed Regulations provide that improvements made by a lessee to leased property satisfy the original use requirement and are considered purchased property having an initial value equal to the unadjusted cost basis of such improvements.
Land Generally Treated as QOZ Business Property If Used in a Trade or Business
The treatment of land has been a topic of much debate since the Prior Proposed Regulations were published, and the Proposed Regulations provide significant, investment-friendly clarification. Where land that is within a QOZ is acquired by purchase or by a qualifying lease (as discussed below), the requirement that either (i) the original use of property in the QOZ commence with the QOF or QOZB, or (ii) the property be substantially improved, is not applicable to the land. Instead, land generally is treated as QOZ business property if it is used in a trade or business (within the meaning of section 162) of a QOF or QOZB. However, a QOF may not treat land as QOZ business property if the land is unimproved or minimally improved and the QOF or the QOZB purchases the land with an expectation, an intention or a view not to improve the land by more than an insubstantial amount within 30 months after the date of purchase.
Application of the Substantial Improvement Rule Done on Asset-by-Asset Basis
The Proposed Regulations clarify that the determination of whether the substantial improvement requirement is satisfied for purchased tangible property is made on an asset-by-asset basis. This could present substantial hurdles for QOZB and QOF compliance in circumstances where an integrated project consists of multiple significant assets and it is neither necessary nor useful to double the tax basis of each asset. For example, where a QOF or QOZB acquires two existing buildings as part of a single project and plans to improve only one of the two buildings (but by investing an amount that is greater than the sum of the purchase price allocable to both buildings), the Proposed Regulations would not permit the substantial improvement test to be applied by looking at the two buildings as a single property. The Preamble suggests, however, that the government is continuing to consider whether to adopt an aggregate approach for substantial improvement.
Clarification and Expansion of the Working Capital Safe Harbor
The Prior Proposed Regulations adopted a 31-month working capital safe harbor for QOF investments in QOZBs that acquire, construct or rehabilitate tangible business property in a QOZ. The safe harbor allows a QOF, in determining whether an entity in which it has invested is a QOZB, to treat the entity’s cash, cash equivalents and short-term debt instruments as a “reasonable” amount of working capital so that the entity is not disqualified from being a QOZB due to it being cash rich, so long as:
The Proposed Regulations make two changes to the application of the working capital safe harbor.
The Proposed Regulations also clarify that a single QOZB can utilize multiple overlapping or sequential 31-month safe harbor periods, provided that for each such period, the QOZB satisfies all of the requirements that would apply if such period were the only one utilized by the QOZB. This clarification provides certainty to QOFs pursuing certain multi-phase real estate development projects that may have been concerned that each QOZB could utilize only one 31-month safe harbor period during the term of such QOZB’s existence.
Use of Inventory in Transit
For purposes of determining whether substantially all of the use of property is in a QOZ, the Proposed Regulations clarify that inventory of a trade or business does not fail to be used in a QOZ solely because the inventory is in transit from a vendor to a facility of the trade or business that is in a QOZ, or from a facility of the trade or business that is in a QOZ to customers of the trade or business that are not located in a QOZ.
Active Conduct of a Trade or Business Requirement
A Trade or Business Includes a Leasing Business, Other than One Engaging Solely in Triple Net Leasing
The Proposed Regulations clarify that, for purposes of the requirement that a QOZB derive at least 50 percent of its gross income from the active conduct of a trade or business within a QOZ, a trade or business has the same meaning as it does under section 162. The Proposed Regulations generally do not address what constitutes the “active conduct” of a trade or business. They do provide, however, that the ownership and operation (including leasing) of real property used in a trade or business is treated as the active conduct of a trade or business for these purposes. Merely entering into a triple net lease with respect to real property is not considered the active conduct of a trade or business for this purpose.
Treatment of Leased Tangible Property
The Proposed Regulations provide that leased tangible property is treated as QOZ business property for purposes of satisfying the 90-percent asset test and the requirement that substantially all tangible property be QOZ business property, so long as:
The Proposed Regulations provide that, as in the case of land, the statutory requirement that QOZ business property must be either original use property or substantially improved property does not apply to leased property. Further, unlike purchased tangible property, the Proposed Regulations do not require leased tangible property to be acquired from a lessor that is unrelated to the QOF or QOZB that is the lessee under the lease.
However, if the lessor and lessee are related, the Proposed Regulations provide the following additional requirements in order for the leased tangible property to be treated as QOZ business property:
The Proposed Regulations also include an anti-abuse rule to prevent the use of leases to circumvent the substantial improvement requirement for purchases of real property (other than unimproved land). Under this rule, if, at the time the lease for real property is entered into, there was a plan, intent or expectation for the real property to be purchased by the QOF or QOZB for an amount other than the fair market value determined at the time of the purchase, the leased real property is not QOZ business property at any time.
Under the Proposed Regulations, leased tangible property must be valued, on an annual basis, using one of two methods that may elected by the QOF with respect to all property that is to be valued for the taxable year:
In contrast to the Prior Proposed Regulations, in the case of both leased property and owned property the applicable financial statement valuation method is not mandatory under the Proposed Regulations even for a QOF that has an applicable financial statement.
50 Percent of Gross Income of a QOZB
A QOZB must derive at least 50 percent of its total gross income from the active conduct of a business within a QOZ. One major area of uncertainty prior to the issuance of the Proposed Regulations, particularly for non-real estate QOZBs, was how to determine whether an item of gross income derived by the QOZB was derived from within a QOZ. The Proposed Regulations provide much-needed clarity to this issue by establishing three safe harbors and a facts and circumstances test for determining whether sufficient income is derived from a trade or business in a QOZ for purposes of the 50-percent test.
A QOZB will be treated as deriving at least 50 percent of its total gross income from within a QOZ if it satisfies any of the following safe harbors:
Facts and Circumstances Test
Businesses not meeting any of the safe harbor tests set forth above may still meet the 50-percent gross income requirement if, based on all the facts and circumstances, at least 50 percent of the gross income of a trade or business is derived from the active conduct of a trade or business in the QOZ. It is unclear how this test will be applied and in what circumstances a QOZB not satisfying any of the safe harbors would nevertheless be treated as satisfying this facts and circumstances test.
Use of Substantial Portion of Intangible Property in the QOZ
As noted above, an entity seeking qualification as a QOZB must use a substantial portion of its intangible property in the active conduct of a trade or business in the QOZ. The Proposed Regulations provide that, for purposes of determining whether a substantial portion of the intangible property of a QOZB is used in the active conduct of a trade or business, the term “substantial portion” means at least 40 percent.
Other Clarifications to the QOZB Requirements
Real Property Straddling a QOZ Boundary
The Proposed Regulations provide special rules for real property that sits both within and outside a QOZ. Specifically, if:
then all the services performed by employees, all business functions and all tangible property that occur in or is located on such contiguous real property is treated as occurring or being located in the QOZ for purposes of the requirement to use substantial portion of intangible property in the QOZ and the requirement to derive 50 percent of gross income from active conduct of a business in the QOZ. For this purpose, the Preamble states that real property located within the QOZ should be considered substantial if the unadjusted cost of the real property inside the QOZ is greater than the unadjusted cost of real property outside of the QOZ.
Clarification of the Term “Substantially All”
The Proposed Regulations clarify that the term “substantially all”:
Thus, with respect to the requirement that during substantially all of the holding period for QOZ business property, substantially all of the use of such property was in a QOZ, the Proposed Regulations clarify that this means that 70 percent of the use of the property must be in a QOZ during 90 percent of the QOZB’s holding period for such property.
QOF Interests Received in Exchange for Non-Cash Property May Qualify for QOZ Benefits
One issue that remained after the issuance of the Prior Proposed Regulations was whether an investor may acquire a qualifying investment in a QOF by contributing non-cash property (rather than cash). The Proposed Regulations clarify that an investor may acquire a qualifying investment by transferring either cash or non-cash property to a QOF regardless of whether the transfer is taxable to the transferor, so long as the transfer is not recharacterized as a transaction other than an investment in the QOF (such as where the transfer is treated as a disguised sale).
Where, however, the investor transfers property to the QOF in a non-recognition transaction, the amount of the qualifying investment equals the lesser of the investor’s adjusted basis in the equity received in the transaction (determined under general principles) and the fair market value of the equity received in the transaction. The portion of the QOF investment in excess of this amount is not treated as a qualifying investment (i.e., the investor will have a “mixed-fund investment,” the same as if it had invested cash in excess of its amount of eligible gain). As a result, the deferral election and the other benefits of the QOZ regime do not apply to such excess portion of the investment.
It is worth noting that, notwithstanding the fact that a qualifying investment in a QOF may be acquired in exchange for a transfer of non-cash property, such property generally will not constitute QOZ business property to the QOF or an underlying entity because it was not acquired by purchase, either because the transferor is treated as related to the QOF or because the transfer was not taxable to the transferor.
Secondary Purchases of QOF Interests May Qualify for QOZ Benefits
Another open question concerned whether the benefits of the QOZ regime would be available to an investor that acquired an interest in a QOF from an existing QOF investor rather than directly from the QOF (i.e., a secondary market transaction). The Proposed Regulations provide that for purposes of the QOZ regime, an investor acquiring an eligible interest in a QOF through a secondary market transaction is treated as making an investment in the QOF in an amount equal to the amount paid for the interest. Thus, the purchased QOF interest should qualify as a qualifying investment to the same extent as if the interest had been acquired directly from the QOF. However, the purchaser’s holding period in the QOF interest will not include the prior owner’s holding period in such interest.
Holding Period in QOF Interests
An investor’s holding period in its qualifying investment is critical to benefitting from the step ups in basis after 5 years and 7 years and the ability to benefit from the FMV Basis Election after 10 years. The Proposed Regulations provide the following rules to clarify how an investor’s holding period in its qualifying investment is determined for purposes of determining eligibility for such QOZ tax benefits:
Section 1231 Gains Treated as Earned on the Last Day of the Taxable Year
The Prior Proposed Regulations clarified that only capital gains are eligible for deferral under the QOZ regime. The application of this rule to “section 1231 gains” (the net amount of which for a taxable year are treated as long-term capital gains) remained uncertain because the amount of net section 1231 gains cannot be determined until the end of the taxpayer’s taxable year. To address this issue, the Proposed Regulations provide that the 180-day period for investing capital gains from section 1231 property in a QOF begins on the last day of the taxable year (i.e., after the amount of long-term capital gains from such property can be determined).
Relief Provided for a Transfer of a Qualifying Investment upon the Death of the Holder
The Proposed Regulations provide several helpful clarifications regarding the application of the QOZ regime when a qualifying investment in a QOF is transferred upon the death of its holder.
General Anti-Abuse Rule
The Proposed Regulations introduce a general anti-abuse rule pursuant to which the government can recast a transaction (or series of transactions) for tax purposes as appropriate to achieve tax results that are consistent with the purposes of the QOZ regime, determined based on all the facts and circumstances. The exact contours of this rule are uncertain given the difficulty of identifying the precise purposes of the QOZ regime and what types of tax results might be considered inconsistent with such purposes.
Special Rules for Consolidated Groups
QOF Stock is Not Stock for Purposes of Affiliation
The Preamble states that the framework of the QOZ regime and the consolidated return regulations are based on incompatible principles and rules. As a result, the Proposed Regulations treat stock in a QOF as not stock for purposes of corporate affiliation under section 1504. Thus, a QOF C corporation can be the common parent of a consolidated group, but it cannot be a subsidiary member of a consolidated group.
Separate Entity Treatment for Members of a Consolidated Group
The Proposed Regulations clarify that the QOZ regime applies separately to each member of a consolidated group. Accordingly, to qualify for gain deferral, the same member of the consolidated group must:
Like the Prior Proposed Regulations, the Proposed Regulations generally will be effective for any taxpayer’s taxable year that ends after the date they are published in final form but, with the exception of the 10-year gain elimination provisions, may be relied upon by taxpayers immediately if applied consistently and in their entirety.
 For a detailed discussion of the Prior Proposed Regulations and a general overview of the QOZ regime, see our prior client publication dated October 22, 2018 entitled “Opportunity Zones: Government Issues Proposed Regulations” available at www.shearman.com.
 If the QOF loses its status as a QOF, the investors in the QOF may lose their QOZ tax benefits.
 It appears that QOF partnerships will be permitted to list separately on the investors’ K-1s their shares of each item of capital gain from the disposition of QOZ property by the QOF partnership only where such property is not a section 1231 asset. Section 1231 gains and losses from the disposition of QOZ property will apparently be required to be reported on a net basis, meaning that this new partner-level election to eliminate gain under the 10-year rule would be applicable only to the investor’s share of the QOF partnership’s net gain for the year from the disposition of section 1231 QOZ property.