‘‘(B) DETERMINATION
OF
BASIS
QUALI-
FIED DISTRESSED OPPORTUNITY ZONE PROP-
ERTY.— 
‘‘(i) IN GENERAL.—Except as other-
wise provided in this clause or subsection 
(c), the taxpayer’s basis in the investment 
shall be zero. 
‘‘(ii) INCREASE
FOR
GAIN
RECOG-
NIZED
UNDER
SUBSECTION (a)(1)(B).— 
The basis in the investment shall be in-
creased by the amount of gain recognized 
by reason of subsection (a)(1)(B) with re-
spect to such property. 
‘‘(iii) INVESTMENTS
HELD
FOR
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
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 
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be increased by an amount equal to 5 per-
cent of the amount of gain deferred by rea-
son 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 sub-
section, 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
DISTRESSED
OPPORTUNITY 
FUND.—For purposes of this section— 
‘‘(1) IN
GENERAL.—The term ‘qualified dis-
tressed opportunity fund’ means any investment ve-
hicle which is organized as a corporation or a part-
nership for the purpose of investing in qualified dis-
tressed opportunity zone property (other than an-
other qualified distressed opportunity fund) that 
holds at least 90 percent of its assets in qualified 
distressed opportunity zone property, determined by 
the average of the percentage of qualified distressed 
opportunity zone property held in the fund as meas-
ured— 
‘‘(A) on the last day of the first 6-month 
period of the taxable year of the fund, and 
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‘‘(B) on the last day of the taxable year of 
the fund. 
‘‘(2) QUALIFIED
DISTRESSED
OPPORTUNITY 
ZONE PROPERTY.— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
distressed opportunity zone property’ means 
property which is— 
‘‘(i) qualified distressed opportunity 
zone stock, 
‘‘(ii) qualified distressed opportunity 
zone partnership interest, or 
‘‘(iii) qualified distressed opportunity 
zone business property. 
‘‘(B) 
QUALIFIED
DISTRESSED
OPPOR-
TUNITY ZONE STOCK.— 
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), the term ‘qualified dis-
tressed opportunity zone stock’ means any 
stock in a domestic corporation if— 
‘‘(I) such stock is acquired by the 
qualified distressed opportunity fund 
after December 31, 2024, at its origi-
nal issue (directly or through an un-
derwriter) from the corporation solely 
in exchange for cash, 
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‘‘(II) as of the time such stock 
was issued, such corporation was a 
qualified distressed opportunity zone 
business (or, in the case of a new cor-
poration, such corporation was being 
organized for purposes of being a 
qualified distressed opportunity zone 
business), and 
‘‘(III) during substantially all of 
the qualified distressed opportunity 
fund’s holding period for such stock, 
such corporation qualified as a quali-
fied distressed opportunity zone busi-
ness. 
‘‘(ii) REDEMPTIONS.—A rule similar 
to the rule of section 1202(c)(3) shall 
apply for purposes of this paragraph. 
‘‘(C) 
QUALIFIED
DISTRESSED
OPPOR-
TUNITY
ZONE
PARTNERSHIP
INTEREST.—The 
term ‘qualified distressed opportunity zone 
partnership interest’ means any capital or prof-
its interest in a domestic partnership if— 
‘‘(i) such interest in acquired by the 
qualified distressed opportunity fund after 
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December 31, 2024, from the partnership 
solely in exchange for cash, 
‘‘(ii) as of the time such interest was 
acquired, such partnership was a qualified 
distressed opportunity zone business (or, in 
the case of a new partnership, such part-
nership was being organized for purposes 
of being a qualified distressed opportunity 
zone business), and 
‘‘(iii) during substantially all of the 
qualified distressed opportunity fund’s 
holding period for such interest, such part-
nership qualified as a qualified distressed 
opportunity zone business. 
‘‘(D) 
QUALIFIED
DISTRESSED
OPPOR-
TUNITY ZONE BUSINESS PROPERTY.— 
‘‘(i) IN GENERAL.—The term ‘quali-
fied distressed opportunity zone business 
property’ means tangible property used in 
a trade or business of the qualified dis-
tressed opportunity fund if— 
‘‘(I) such property was acquired 
by the qualified distressed opportunity 
fund by purchase (as defined in sec-
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tion 179(d)(2)) after December 31, 
2024, 
‘‘(II) the original use of such 
property in the qualified distressed 
opportunity zone commences with the 
qualified distressed opportunity fund 
or the qualified distressed opportunity 
fund substantially improves the prop-
erty, and 
‘‘(III) during substantially all of 
the qualified distressed opportunity 
fund’s holding period for such prop-
erty, substantially all of the use of 
such property was in a qualified dis-
tressed opportunity zone. 
‘‘(ii) SUBSTANTIAL IMPROVEMENT.— 
For purposes of subparagraph (A)(ii), 
property shall be treated as substantially 
improved by the qualified distressed oppor-
tunity fund only if, during any 30-month 
period beginning after the date of acquisi-
tion of such property, additions to basis 
with respect to such property in the hands 
of the qualified distressed opportunity fund 
exceed an amount equal to the adjusted 
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basis of such property at the beginning of 
such 30-month period in the hands of the 
qualified distressed opportunity fund. 
‘‘(iii) RELATED
PARTY.—For pur-
poses 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 sec-
tion 179(d)(2)(A). 
‘‘(3) QUALIFIED
DISTRESSED
OPPORTUNITY 
ZONE BUSINESS.— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
distressed opportunity zone business’ means a 
trade or business— 
‘‘(i) in which substantially all of the 
tangible property owned or leased by the 
taxpayer is qualified distressed opportunity 
zone business property (determined by sub-
stituting ‘qualified distressed opportunity 
zone business’ for ‘qualified distressed op-
portunity fund’ each place it appears in 
subparagraph (D)), 
‘‘(ii) which satisfies the requirements 
of paragraphs (2), (4), and (8) of section 
1397C(b), and 
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‘‘(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 distressed opportunity zone 
business property shall continue to be treated 
as a qualified distressed opportunity zone busi-
ness 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 
distressed opportunity zone business. 
‘‘(4) QUALIFIED
DISTRESSED
OPPORTUNITY 
ZONE.—The term ‘qualified distressed opportunity 
zone’ means— 
‘‘(A) a brownfield site (as defined in sec-
tion 101(39) of the Comprehensive Environ-
mental Response, Compensation, and Liability 
Act of 1980), or 
‘‘(B) a facility that is included on the Na-
tional Priorities List developed by the President 
in accordance with section 105(a)(8)(B) of the 
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Comprehensive Environmental Response, Com-
pensation, and Liability Act of 1980. 
‘‘(e) APPLICABLE RULES.— 
‘‘(1) TREATMENT
OF
INVESTMENTS
WITH 
MIXED FUNDS.—In the case of any investment in a 
qualified distressed 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 sub-
section (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 sub-
paragraph (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’ for ‘50 per-
cent’ each place it occurs in such sections. 
‘‘(3) DECEDENTS.—In the case of a decedent, 
amounts recognized under this section shall, if not 
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properly includible in the gross income of the dece-
dent, be included in gross income as provided by sec-
tion 691. 
‘‘(4) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this section, 
including— 
‘‘(A) rules for the certification of qualified 
distressed opportunity funds for the purposes of 
this section, 
‘‘(B) rules to ensure a qualified distressed 
opportunity fund has a reasonable period of 
time to reinvest the return of capital from in-
vestments in qualified distressed opportunity 
zone stock and qualified distressed opportunity 
zone partnership interests, and to reinvest pro-
ceeds received from the sale or disposition of 
qualified distressed opportunity zone property, 
and 
‘‘(C) rules to prevent abuse. 
‘‘(f) FAILURE OF QUALIFIED DISTRESSED OPPOR-
TUNITY FUND TO MAINTAIN INVESTMENT STANDARD.— 
‘‘(1) IN GENERAL.—If a qualified distressed op-
portunity fund fails to meet the 90-percent require-
ment of subsection (d)(1), the qualified distressed 
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opportunity fund shall pay a penalty for reach 
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 quali-
fied distressed 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 distressed opportunity 
fund is a partnership, the penalty imposed by para-
graph (1) shall be taken int 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 is amended by adding at 
the end the following new item: 
‘‘Sec. 1400Z–3. Special rules for capital gains invested in distressed oppor-
tunity zones.’’. 
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(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to amounts invested after the date 
of the enactment of this Act. 
Æ 
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