Rural Opportunity Zone and Investment Act

To amend the Internal Revenue Code of 1986 to establish special rules for capital gains invested in rural opportunity zones. 1. Short title This Act may be cited as the Rural Opportunity Zone and Investment Act 2. Establishment of special rules for capital gains invested in rural opportunity zones (a) In general Subchapter Z of chapter 1 1400Z–3. Special rules for capital gains invested in rural opportunity zones (a) In general (1) Treatment of gains In the case of capital gain from the sale to, or exchange with, an unrelated person of any property held by the taxpayer, at the election of the taxpayer— (A) gross income for the taxable year shall not include so much of such gain as does not exceed the aggregate amount invested by the taxpayer in a qualified rural opportunity fund during the 180-day period beginning on the date of such sale or exchange, (B) the amount of gain excluded by subparagraph (A) shall be included in gross income as provided by subsection (b), and (C) subsection (c) shall apply. (2) Election No election may be made under paragraph (1)— (A) with respect to a sale or exchange if an election previously made with respect to such sale or exchange is in effect, or (B) with respect to any sale or exchange after December 31, 2032. (b) Deferral of gain invested in qualified rural opportunity zone property (1) Year of inclusion Gain to which subsection (a)(1)(B) applies shall be included in income in the taxable year which includes the earlier of— (A) the date on which such investment is sold or exchanged, or (B) December 31, 2032. (2) Amount includible (A) In general The amount of gain included in gross income under subsection (a)(1)(A) shall be the excess of— (i) the lesser of the amount of gain excluded under paragraph (1) or the fair market value of the investment as determined as of the date described in paragraph (1), over (ii) the taxpayer’s basis in the investment. (B) Determination of basis qualified rural opportunity zone property (i) In general Except as otherwise provided in this clause or subsection (c), the taxpayer’s basis in the investment shall be zero. (ii) Increase for gain recognized under subsection (a)(1)(b) The basis in the investment shall be increased by the amount of gain recognized by reason of subsection (a)(1)(B) with respect to such property. (iii) Investments held for 5 years In the case of any investment held for at least 5 years, the basis of such investment shall be increased by an amount equal to 10 percent of the amount of gain deferred by reason of subsection (a)(1)(A). (iv) Investments held for 7 years In the case of any investment held by the taxpayer for at least 7 years, in addition to any adjustment made under clause (iii), the basis of such property shall be increased by an amount equal to 5 percent of the amount of gain deferred by reason of subsection (a)(1)(A). (c) Special rule for investments held for at least 10 years In the case of any investment held by the taxpayer for at least 10 years and with respect to which the taxpayer makes an election under this subsection, the basis of such property shall be equal to the fair market value of such investment on the date that the investment is sold or exchanged. (d) Qualified rural opportunity fund For purposes of this section— (1) In general The term qualified rural opportunity fund (A) on the last day of the first 6-month period of the taxable year of the fund, and (B) on the last day of the taxable year of the fund. (2) Qualified rural opportunity zone property (A) In general The term qualified rural opportunity zone property (i) qualified rural opportunity zone stock, (ii) qualified rural opportunity zone partnership interest, or (iii) qualified rural opportunity zone business property. (B) Qualified rural opportunity zone stock (i) In general Except as provided in clause (ii), the term qualified rural opportunity zone stock (I) such stock is acquired by the qualified rural opportunity fund after December 31, 2023, at its original issue (directly or through an underwriter) from the corporation solely in exchange for cash, (II) as of the time such stock was issued, such corporation was a qualified rural opportunity zone business (or, in the case of a new corporation, such corporation was being organized for purposes of being a qualified rural opportunity zone business), and (III) during substantially all of the qualified rural opportunity fund’s holding period for such stock, such corporation qualified as a qualified rural opportunity zone business. (ii) Redemptions A rule similar to the rule of section 1202(c)(3) shall apply for purposes of this paragraph. (C) Qualified rural opportunity zone partnership interest The term qualified rural opportunity zone partnership interest (i) such interest is acquired by the qualified rural opportunity fund after December 31, 2023, from the partnership solely in exchange for cash, (ii) as of the time such interest was acquired, such partnership was a qualified rural opportunity zone business (or, in the case of a new partnership, such partnership was being organized for purposes of being a qualified rural opportunity zone business), and (iii) during substantially all of the qualified rural opportunity fund’s holding period for such interest, such partnership qualified as a qualified rural opportunity zone business. (D) Qualified rural opportunity zone business property (i) In general The term qualified rural opportunity zone business property (I) such property was acquired by the qualified rural opportunity fund by purchase (as defined in section 179(d)(2)) after December 31, 2023, (II) the original use of such property in the qualified rural opportunity zone commences with the qualified rural opportunity fund or the qualified rural opportunity fund substantially improves the property, and (III) during substantially all of the qualified rural opportunity fund’s holding period for such property, substantially all of the use of such property was in a qualified rural opportunity zone. (ii) Substantial improvement For purposes of subparagraph (A)(ii), property shall be treated as substantially improved by the qualified rural opportunity fund only if, during any 30-month period beginning after the date of acquisition of such property, additions to basis with respect to such property in the hands of the qualified rural opportunity fund exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the qualified rural opportunity fund. (iii) Related party For purposes of subparagraph (A)(i), the related person rule of section 179(d)(2) shall be applied pursuant to subsection (e)(2) in lieu of the application of such rule in section 179(d)(2)(A). (3) Qualified rural opportunity zone business (A) In general The term qualified rural opportunity zone business (i) in which substantially all of the tangible property owned or leased by the taxpayer is qualified rural opportunity zone business property (determined by substituting qualified rural opportunity zone business qualified rural opportunity fund (ii) which satisfies the requirements of paragraphs (2), (4), and (8) of section 1397C(b), and (iii) which is not described in section 144(c)(6)(B). (B) Special rule For purposes of subparagraph (A), tangible property that ceases to be a qualified rural opportunity zone business property shall continue to be treated as a qualified rural opportunity zone business property for the lesser of— (i) 5 years after the date on which such tangible property ceases to be so qualified, or (ii) the date on which such tangible property is no longer held by the qualified rural opportunity zone business. (4) Qualified rural opportunity zone (A) In general The term qualified rural opportunity zone (i) is located in a rural county, and (ii) is in persistent poverty (as determined by the Bureau of the Census as of the date of the enactment of this Act). (B) Rural county The term rural county (e) Applicable rules (1) Treatment of investments with mixed funds In the case of any investment in a qualified rural opportunity fund only a portion of which consists of investments of gain to which an election under subsection (a) is in effect— (A) such investment shall be treated as 2 separate investments, consisting of— (i) one investment that only includes amounts to which the election under subsection (a) applies, and (ii) a separate investment consisting of other amounts, and (B) subsections (a), (b), and (c) shall only apply to the investment described in subparagraph (A)(i). (2) Related persons For purposes of this section, persons are related to each other if such persons are described in section 267(b) or 707(b)(1), determined by substituting 20 percent 50 percent (3) Decedents In the case of a decedent, amounts recognized under this section shall, if not properly includible in the gross income of the decedent, be includible in gross income as provided by section 691. (4) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including— (A) rules for the certification of qualified rural opportunity funds for the purposes of this section, (B) rules to ensure a qualified rural opportunity fund has a reasonable period of time to reinvest the return of capital from investments in qualified rural opportunity zone stock and qualified rural opportunity zone partnership interests, and to reinvest proceeds received from the sale or disposition of qualified rural opportunity zone property, and (C) rules to prevent abuse. (f) Failure of qualified rural opportunity fund To maintain investment standard (1) In general If a qualified rural opportunity fund fails to meet the 90-percent requirement of subsection (d)(1), the qualified rural opportunity fund shall pay a penalty for each month it fails to meet the requirement in an amount equal to the product of— (A) the excess of— (i) the amount equal to 90 percent of its aggregate assets, over (ii) the aggregate amount of qualified rural opportunity zone property held by the fund, multiplied by (B) the underpayment rate established under section 6621(a)(2) for such month. (2) Special rule for partnerships In the case that the qualified rural opportunity fund is a partnership, the penalty imposed by paragraph (1) shall be taken into account proportionately as part of the distributive share of each partner of the partnership. (3) Reasonable cause exception No penalty shall be imposed under this subsection with respect to any failure if it is shown that such failure is due to reasonable cause. . (b) Clerical amendment The table of sections for subchapter Z of chapter 1 of such Code is amended by adding at the end the following new item: Sec. 1400Z–3. Special rules for capital gains invested in rural opportunity zones. . (c) Effective date The amendments made by this section shall apply to amounts invested after the date of the enactment of this section.

Summary: Rural Opportunity Zone and Investment Act This bill provides for the deferral of tax until December 31, 2032, on capital gains invested in qualified rural opportunity zones. A qualified rural opportunity zone is any population census tract that is located in a rural county and is in persistent poverty.