Rural Opportunity Zone and Investment Act

I 118TH CONGRESS 1ST SESSION H. R. 3906 To amend the Internal Revenue Code of 1986 to establish special rules for capital gains invested in rural opportunity zones. IN THE HOUSE OF REPRESENTATIVES JUNE 7, 2023 Mr. FERGUSON (for himself, Mrs. MILLER of West Virginia, Mr. FEENSTRA, and Mr. KUSTOFF) introduced the following bill; which was referred to the Committee on Ways and Means A BILL To amend the Internal Revenue Code of 1986 to establish special rules for capital gains invested in rural oppor- tunity zones. Be it enacted by the Senate and House of Representa- 1 tives of the United States of America in Congress assembled, 2 SECTION 1. SHORT TITLE. 3 This Act may be cited as the ‘‘Rural Opportunity 4 Zone and Investment Act’’. 5 VerDate Sep 11 2014 06:45 Jul 06, 2023 Jkt 039200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H3906.IH H3906 pbinns on DSKJLVW7X2PROD with $$_JOB 2 •HR 3906 IH SEC. 2. ESTABLISHMENT OF SPECIAL RULES FOR CAPITAL 1 GAINS INVESTED IN RURAL OPPORTUNITY 2 ZONES. 3 (a) IN GENERAL.—Subchapter Z of chapter 1 of the 4 Internal Revenue Code of 1986 is amended by adding at 5 the end the following new section: 6 ‘‘SEC. 1400Z–3. SPECIAL RULES FOR CAPITAL GAINS IN- 7 VESTED IN RURAL OPPORTUNITY ZONES. 8 ‘‘(a) IN GENERAL.— 9 ‘‘(1) TREATMENT OF GAINS.—In the case of 10 capital gain from the sale to, or exchange with, an 11 unrelated person of any property held by the tax- 12 payer, at the election of the taxpayer— 13 ‘‘(A) gross income for the taxable year 14 shall not include so much of such gain as does 15 not exceed the aggregate amount invested by 16 the taxpayer in a qualified rural opportunity 17 fund during the 180-day period beginning on 18 the date of such sale or exchange, 19 ‘‘(B) the amount of gain excluded by sub- 20 paragraph (A) shall be included in gross income 21 as provided by subsection (b), and 22 ‘‘(C) subsection (c) shall apply. 23 ‘‘(2) ELECTION.—No election may be made 24 under paragraph (1)— 25 VerDate Sep 11 2014 06:45 Jul 06, 2023 Jkt 039200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\H3906.IH H3906 pbinns on DSKJLVW7X2PROD with $$_JOB 3 •HR 3906 IH ‘‘(A) with respect to a sale or exchange if 1 an election previously made with respect to such 2 sale or exchange is in effect, or 3 ‘‘(B) with respect to any sale or exchange 4 after December 31, 2032. 5 ‘‘(b) DEFERRAL OF GAIN INVESTED IN QUALIFIED 6 RURAL OPPORTUNITY ZONE PROPERTY.— 7 ‘‘(1) YEAR OF INCLUSION.—Gain to which sub- 8 section (a)(1)(B) applies shall be included in income 9 in the taxable year which includes the earlier of— 10 ‘‘(A) the date on which such investment is 11 sold or exchanged, or 12 ‘‘(B) December 31, 2032. 13 ‘‘(2) AMOUNT INCLUDIBLE.— 14 ‘‘(A) IN GENERAL.—The amount of gain 15 included in gross income under subsection 16 (a)(1)(A) shall be the excess of— 17 ‘‘(i) the lesser of the amount of gain 18 excluded under paragraph (1) or the fair 19 market value of the investment as deter- 20 mined as of the date described in para- 21 graph (1), over 22 ‘‘(ii) the taxpayer’s basis in the in- 23 vestment. 24 VerDate Sep 11 2014 06:45 Jul 06, 2023 Jkt 039200 PO 00000 Frm 00003 Fmt 6652 Sfmt 6201 E:\BILLS\H3906.IH H3906 pbinns on DSKJLVW7X2PROD with $$_JOB 4 •HR 3906 IH ‘‘(B) DETERMINATION OF BASIS QUALI- 1 FIED RURAL OPPORTUNITY ZONE PROPERTY.— 2 ‘‘(i) IN GENERAL.—Except as other- 3 wise provided in this clause or subsection 4 (c), the taxpayer’s basis in the investment 5 shall be zero. 6 ‘‘(ii) INCREASE FOR GAIN RECOG- 7 NIZED UNDER SUBSECTION (A)(1)(B).—The 8 basis in the investment shall be increased 9 by the amount of gain recognized by rea- 10 son of subsection (a)(1)(B) with respect to 11 such property. 12 ‘‘(iii) INVESTMENTS HELD FOR 5 13 YEARS.—In the case of any investment 14 held for at least 5 years, the basis of such 15 investment shall be increased by an 16 amount equal to 10 percent of the amount 17 of gain deferred by reason of subsection 18 (a)(1)(A). 19 ‘‘(iv) INVESTMENTS HELD FOR 7 20 YEARS.—In the case of any investment 21 held by the taxpayer for at least 7 years, 22 in addition to any adjustment made under 23 clause (iii), the basis of such property shall 24 be increased by an amount equal to 5 per- 25 VerDate Sep 11 2014 06:45 Jul 06, 2023 Jkt 039200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H3906.IH H3906 pbinns on DSKJLVW7X2PROD with $$_JOB 5 •HR 3906 IH cent of the amount of gain deferred by rea- 1 son of subsection (a)(1)(A). 2 ‘‘(c) SPECIAL RULE FOR INVESTMENTS HELD FOR 3 AT LEAST 10 YEARS.—In the case of any investment held 4 by the taxpayer for at least 10 years and with respect to 5 which the taxpayer makes an election under this sub- 6 section, the basis of such property shall be equal to the 7 fair market value of such investment on the date that the 8 investment is sold or exchanged. 9 ‘‘(d) QUALIFIED RURAL OPPORTUNITY FUND.—For 10 purposes of this section— 11 ‘‘(1) IN GENERAL.—The term ‘qualified rural 12 opportunity fund’ means any investment vehicle 13 which is organized as a corporation or a partnership 14 for the purpose of investing in qualified rural oppor- 15 tunity zone property (other than another qualified 16 rural opportunity fund) that holds at least 90 per- 17 cent of its assets in qualified rural opportunity zone 18 property, determined by the average of the percent- 19 age of qualified rural opportunity zone property held 20 in the fund as measured— 21 ‘‘(A) on the last day of the first 6-month 22 period of the taxable year of the fund, and 23 ‘‘(B) on the last day of the taxable year of 24 the fund. 25 VerDate Sep 11 2014 06:45 Jul 06, 2023 Jkt 039200 PO 00000 Frm 00005 Fmt 6652 Sfmt 6201 E:\BILLS\H3906.IH H3906 pbinns on DSKJLVW7X2PROD with $$_JOB 6 •HR 3906 IH ‘‘(2) QUALIFIED RURAL OPPORTUNITY ZONE 1 PROPERTY.— 2 ‘‘(A) IN GENERAL.—The term ‘qualified 3 rural opportunity zone property’ means prop- 4 erty which is— 5 ‘‘(i) qualified rural opportunity zone 6 stock, 7 ‘‘(ii) qualified rural opportunity zone 8 partnership interest, or 9 ‘‘(iii) qualified rural opportunity zone 10 business property. 11 ‘‘(B) QUALIFIED RURAL OPPORTUNITY 12 ZONE STOCK.— 13 ‘‘(i) IN GENERAL.—Except as pro- 14 vided in clause (ii), the term ‘qualified 15 rural opportunity zone stock’ means any 16 stock in a domestic corporation if— 17 ‘‘(I) such stock is acquired by the 18 qualified rural opportunity fund after 19 December 31, 2023, at its original 20 issue (directly or through an under- 21 writer) from the corporation solely in 22 exchange for cash, 23 ‘‘(II) as of the time such stock 24 was issued, such corporation was a 25 VerDate Sep 11 2014 06:45 Jul 06, 2023 Jkt 039200 PO 00000 Frm 00006 Fmt 6652 Sfmt 6201 E:\BILLS\H3906.IH H3906 pbinns on DSKJLVW7X2PROD with $$_JOB 7 •HR 3906 IH qualified rural opportunity zone busi- 1 ness (or, in the case of a new corpora- 2 tion, such corporation was being orga- 3 nized for purposes of being a qualified 4 rural opportunity zone business), and 5 ‘‘(III) during substantially all of 6 the qualified rural opportunity fund’s 7 holding period for such stock, such 8 corporation qualified as a qualified 9 rural opportunity zone business. 10 ‘‘(ii) REDEMPTIONS.—A rule similar 11 to the rule of section 1202(c)(3) shall 12 apply for purposes of this paragraph. 13 ‘‘(C) QUALIFIED RURAL OPPORTUNITY 14 ZONE PARTNERSHIP INTEREST.—The term 15 ‘qualified rural opportunity zone partnership in- 16 terest’ means any capital or profits interest in 17 a domestic partnership if— 18 ‘‘(i) such interest is acquired by the 19 qualified rural opportunity fund after De- 20 cember 31, 2023, from the partnership 21 solely in exchange for cash, 22 ‘‘(ii) as of the time such interest was 23 acquired, such partnership was a qualified 24 rural opportunity zone business (or, in the 25 VerDate Sep 11 2014 06:45 Jul 06, 2023 Jkt 039200 PO 00000 Frm 00007 Fmt 6652 Sfmt 6201 E:\BILLS\H3906.IH H3906 pbinns on DSKJLVW7X2PROD with $$_JOB 8 •HR 3906 IH case of a new partnership, such partner- 1 ship was being organized for purposes of 2 being a qualified rural opportunity zone 3 business), and 4 ‘‘(iii) during substantially all of the 5 qualified rural opportunity fund’s holding 6 period for such interest, such partnership 7 qualified as a qualified rural opportunity 8 zone business. 9 ‘‘(D) QUALIFIED RURAL OPPORTUNITY 10 ZONE BUSINESS PROPERTY.— 11 ‘‘(i) IN GENERAL.—The term ‘quali- 12 fied rural opportunity zone business prop- 13 erty’ means tangible property used in a 14 trade or business of the qualified rural op- 15 portunity fund if— 16 ‘‘(I) such property was acquired 17 by the qualified rural opportunity 18 fund by purchase (as defined in sec- 19 tion 179(d)(2)) after December 31, 20 2023, 21 ‘‘(II) the original use of such 22 property in the qualified rural oppor- 23 tunity zone commences with the quali- 24 fied rural opportunity fund or the 25 VerDate Sep 11 2014 06:45 Jul 06, 2023 Jkt 039200 PO 00000 Frm 00008 Fmt 6652 Sfmt 6201 E:\BILLS\H3906.IH H3906 pbinns on DSKJLVW7X2PROD with $$_JOB 9 •HR 3906 IH qualified rural opportunity fund sub- 1 stantially improves the property, and 2 ‘‘(III) during substantially all of 3 the qualified rural opportunity fund’s 4 holding period for such property, sub- 5 stantially all of the use of such prop- 6 erty was in a qualified rural oppor- 7 tunity zone. 8 ‘‘(ii) SUBSTANTIAL IMPROVEMENT.— 9 For purposes of subparagraph (A)(ii), 10 property shall be treated as substantially 11 improved by the qualified rural opportunity 12 fund only if, during any 30-month period 13 beginning after the date of acquisition of 14 such property, additions to basis with re- 15 spect to such property in the hands of the 16 qualified rural opportunity fund exceed an 17 amount equal to the adjusted basis of such 18 property at the beginning of such 30- 19 month period in the hands of the qualified 20 rural opportunity fund. 21 ‘‘(iii) RELATED PARTY.—For pur- 22 poses of subparagraph (A)(i), the related 23 person rule of section 179(d)(2) shall be 24 applied pursuant to subsection (e)(2) in 25 VerDate Sep 11 2014 06:45 Jul 06, 2023 Jkt 039200 PO 00000 Frm 00009 Fmt 6652 Sfmt 6201 E:\BILLS\H3906.IH H3906 pbinns on DSKJLVW7X2PROD with $$_JOB 10 •HR 3906 IH lieu of the application of such rule in sec- 1 tion 179(d)(2)(A). 2 ‘‘(3) QUALIFIED RURAL OPPORTUNITY ZONE 3 BUSINESS.— 4 ‘‘(A) IN GENERAL.—The term ‘qualified 5 rural opportunity zone business’ means a trade 6 or business— 7 ‘‘(i) in which substantially all of the 8 tangible property owned or leased by the 9 taxpayer is qualified rural opportunity zone 10 business property (determined by sub- 11 stituting ‘qualified rural opportunity zone 12 business’ for ‘qualified rural opportunity 13 fund’ each place it appears in paragraph 14 (2)(D)), 15 ‘‘(ii) which satisfies the requirements 16 of paragraphs (2), (4), and (8) of section 17 1397C(b), and 18 ‘‘(iii) which is not described in section 19 144(c)(6)(B). 20 ‘‘(B) SPECIAL RULE.—For purposes of 21 subparagraph (A), tangible property that ceases 22 to be a qualified rural opportunity zone busi- 23 ness property shall continue to be treated as a 24 VerDate Sep 11 2014 06:45 Jul 06, 2023 Jkt 039200 PO 00000 Frm 00010 Fmt 6652 Sfmt 6201 E:\BILLS\H3906.IH H3906 pbinns on DSKJLVW7X2PROD with $$_JOB 11 •HR 3906 IH qualified rural opportunity zone business prop- 1 erty for the lesser of— 2 ‘‘(i) 5 years after the date on which 3 such tangible property ceases to be so 4 qualified, or 5 ‘‘(ii) the date on which such tangible 6 property is no longer held by the qualified 7 rural opportunity zone business. 8 ‘‘(4) QUALIFIED RURAL OPPORTUNITY ZONE.— 9 ‘‘(A) IN GENERAL.—The term ‘qualified 10 rural opportunity zone’ means any population 11 census tract which— 12 ‘‘(i) is located in a rural county, and 13 ‘‘(ii) is in persistent poverty (as deter- 14 mined by the Bureau of the Census as of 15 the date of the enactment of this Act). 16 ‘‘(B) RURAL COUNTY.—The term ‘rural 17 county’ means any county if more than 50 per- 18 cent of the census blocks which comprise such 19 county are rural blocks (as determined by the 20 Bureau of the Census as of the date of the en- 21 actment of this Act). A rule similar to section 22 143(k)(2)(D) shall apply for purposes of the 23 preceding sentence. 24 ‘‘(e) APPLICABLE RULES.— 25 VerDate Sep 11 2014 06:45 Jul 06, 2023 Jkt 039200 PO 00000 Frm 00011 Fmt 6652 Sfmt 6201 E:\BILLS\H3906.IH H3906 pbinns on DSKJLVW7X2PROD with $$_JOB 12 •HR 3906 IH ‘‘(1) TREATMENT OF INVESTMENTS WITH 1 MIXED FUNDS.—In the case of any investment in a 2 qualified rural opportunity fund only a portion of 3 which consists of investments of gain to which an 4 election under subsection (a) is in effect— 5 ‘‘(A) such investment shall be treated as 2 6 separate investments, consisting of— 7 ‘‘(i) one investment that only includes 8 amounts to which the election under sub- 9 section (a) applies, and 10 ‘‘(ii) a separate investment consisting 11 of other amounts, and 12 ‘‘(B) subsections (a), (b), and (c) shall 13 only apply to the investment described in sub- 14 paragraph (A)(i). 15 ‘‘(2) RELATED PERSONS.—For purposes of this 16 section, persons are related to each other if such 17 persons are described in section 267(b) or 707(b)(1), 18 determined by substituting ‘20 percent’ for ‘50 per- 19 cent’ each place it occurs in such sections. 20 ‘‘(3) DECEDENTS.—In the case of a decedent, 21 amounts recognized under this section shall, if not 22 properly includible in the gross income of the dece- 23 dent, be includible in gross income as provided by 24 section 691. 25 VerDate Sep 11 2014 06:45 Jul 06, 2023 Jkt 039200 PO 00000 Frm 00012 Fmt 6652 Sfmt 6201 E:\BILLS\H3906.IH H3906 pbinns on DSKJLVW7X2PROD with $$_JOB 13 •HR 3906 IH ‘‘(4) REGULATIONS.—The Secretary shall pre- 1 scribe such regulations as may be necessary or ap- 2 propriate to carry out the purposes of this section, 3 including— 4 ‘‘(A) rules for the certification of qualified 5 rural opportunity funds for the purposes of this 6 section, 7 ‘‘(B) rules to ensure a qualified rural op- 8 portunity fund has a reasonable period of time 9 to reinvest the return of capital from invest- 10 ments in qualified rural opportunity zone stock 11 and qualified rural opportunity zone partner- 12 ship interests, and to reinvest proceeds received 13 from the sale or disposition of qualified rural 14 opportunity zone property, and 15 ‘‘(C) rules to prevent abuse. 16 ‘‘(f) FAILURE OF QUALIFIED RURAL OPPORTUNITY 17 FUND TO MAINTAIN INVESTMENT STANDARD.— 18 ‘‘(1) IN GENERAL.—If a qualified rural oppor- 19 tunity fund fails to meet the 90-percent requirement 20 of subsection (d)(1), the qualified rural opportunity 21 fund shall pay a penalty for each month it f [Text truncated for display. 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