Opportunity Zones Introduction Benefits of the Opportunity Zones
Opportunity Zones Introduction • Benefits of the Opportunity Zones Tax Incentives • Qualified Opportunity Zones – Qualification and Status • Qualified Opportunity Funds – What are the rules, how do you qualify? – Direct and indirect investment in Qualified Opportunity Zone Business Property • Qualified Opportunity Zone Business Property www. opportunityzoneresourcecenter. com September 5, 2018
Taxpayers can get capital gains tax deferral (& more) for making timely investments in Qualified Opportunity Funds (QOFs) which invest in Qualified Opportunity Zone Property www. opportunityzoneresourcecenter. com September 5, 2018
3 Tax Incentive Benefits 1. Gain Deferral 2. Partial forgiveness www. opportunityzoneresourcecenter. com 3. Forgiveness of additional gains September 5, 2018
Sample Investment Jan. 2, 2018 Taxpayer enters into a sale that generates $1 M of capital gain June 30, 2018 (Within 180 days), Taxpayer contributes entire $1 M of capital gain to a Qualified Opportunity Fund 2018 2019 • • Taxpayer is deemed to have a $0 basis in its QOF investment QOF Invests the $1 MM in Qualified Opportunity Zone Property 2020 2021 www. opportunityzoneresourcecenter. com 2022 September 5, 2018 2023
Sample Investment June 30, 2023 (After 5 years), Taxpayer’s basis in investment in QOF increases from $0 to $100 k 2023 2024 June 30, 2025 (After 7 years), Taxpayer’s basis in investment in QOF increases from $100 k to $150 k 2025 2026 www. opportunityzoneresourcecenter. com Dec. 31, 2026 $850 K of the 1 MM of deferred capital gains are taxed and the basis in QOF investment increases to $1 MM. 2027 June 30, 2028 (10 years later), Taxpayer sells investment for $2. 0 MM. Basis is deemed to be FMV. Thus, no tax on appreciation 2028 September 5, 2018
Opportunity Zone Incremental Benefit Standard After Tax IRR Total IRR 10. 00% 9. 08% 8. 08% 7. 95% 7. 71% 6. 00% 5 Year 7 Year 12/31/2026 10 Year 8. 00% 7. 00% 6. 00% 5. 00% 4. 00% 3. 00% 2. 00% 1. 00% 0. 00% 23. 8% Tax Rate Standard After Tax IRR Incremental OZ Benefit OZ Investment IRR Percentage Increase 5 Year 6. 00% 2. 08% 8. 08% 35% 7 Year 6. 00% 1. 95% 7. 95% 32% 12/31/2026 6. 00% 1. 71% 7. 71% 29% www. opportunityzoneresourcecenter. com 10 Year 6. 00% 3. 08% 9. 08% 51% September 5, 2018
Perishability of Incentives 3. 50% 3. 08% 3. 00% 2. 96% 2. 74% 2. 61% Incremental IRR 2. 50% 2. 25% 2. 09% 2. 00% 1. 91% 1. 74% 1. 50% 1. 00% 0. 50% 0. 00% 2018 2019 2020 2021 2022 2023 2024 2025 Year of QOF Initial Investment www. opportunityzoneresourcecenter. com September 5, 2018
Taxpayers can get capital gains tax deferral (& more) for making timely investments in Qualified Opportunity Funds (QOFs) www. opportunityzoneresourcecenter. com September 5, 2018
Qualified Opportunity Fund Statutory Requirements • Purpose • Certification • Assets Test • Noncompliance Penalty Certification Process www. opportunityzoneresourcecenter. com September 5, 2018
Qualified Opportunity Fund - Purpose An investment vehicle organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zone Property (QOZP). www. opportunityzoneresourcecenter. com September 5, 2018
Certification Process • IRS announces self-certification process for QOFs • Self-certification form to be attached to tax return www. opportunityzoneresourcecenter. com September 5, 2018
Qualified Opportunity Fund – Assets Test Must hold at least 90% of assets in QOZP, determined by the average of the percentage of QOZP held on: The last day of the first six month period of the fund’s taxable year, and The last day of the fund’s taxable year June 30 th JAN FEB MAR APR MAY JUN December 31 st JUL AUG www. opportunityzoneresourcecenter. com SEPT OCT NOV September 5, 2018 DEC
Qualified Opportunity Fund – Noncompliance Penalty Failure to meet 90% investment standard Per month penalty for failing to meet 90% test x % shortfall underpayment rate penalty No penalty if it is shown failure is due to reasonable cause (Federal short-term rate plus 3%) – currently 4% www. opportunityzoneresourcecenter. com September 5, 2018
Taxpayers can get capital gains tax deferral (& more) for making timely investments in Qualified Opportunity Funds (QOFs) which invest in Qualified Opportunity Zone Property www. opportunityzoneresourcecenter. com September 5, 2018
Qualified Opportunity Zone Property (QOZP) Qualified Opportunity Zone Stock Qualified Opportunity Zone Partnership Interest Qualified Opportunity Zone Business Property www. opportunityzoneresourcecenter. com September 5, 2018
Qualified Opportunity Zone Stock and Partnership Interests • The investment must be acquired after December 31, 2017 in exchange for cash; • Must be a qualified opportunity zone business, or is being organized for the purpose of being a qualified opportunity zone business; • Must remain a qualified opportunity zone business for substantially all of the qualified opportunity fund’s holding period www. opportunityzoneresourcecenter. com September 5, 2018
Qualified Opportunity Zone Businesses (QOZB) A trade or business in which substantially all of the tangible property owned or leased by the taxpayer is qualified opportunity zone business property (QOZBP) and: At least 50% of income derived from Active Conduct Substantial portion of intangible property used in active conduct of business www. opportunityzoneresourcecenter. com < 5 percent unadjusted basis of property is nonqualified financial property September 5, 2018
QOZB: Excluded Businesses Can’t be a “Sin Business” A private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. www. opportunityzoneresourcecenter. com September 5, 2018
Qualified Opportunity Zone Business Property (QOZBP) • Tangible property used in a trade or business • Acquired by purchase from an unrelated party (20% standard) after December 31, 2017 • During substantially all of holding period, substantially all the use is in a QOZ • Original use in the QOZ commences with the taxpayer • OR • Taxpayer substantially improves the property • during any 30 -month period after acquisition, additions to basis exceed an amount equal to the adjusted basis of such property at the beginning of such period www. opportunityzoneresourcecenter. com September 5, 2018
Qualified Opportunity Zones CDFI Fund Opportunity Zones Mapping Tool: https: //www. cdfifund. gov/Pages/Opportunity-Zones. aspx www. opportunityzoneresourcecenter. com September 5, 2018
Questions? www. opportunityzoneresourcecenter. com September 5, 2018
Non-Traditional Alternative Financing Sources: Soft Funds, Opportunity Zone Funds Thomas J. Fantin Glenn A. Graff James Peck Roy Williams Novogradac & Company LLP Tiber Hudson LLC Applegate, Thorne Thompson Wells Fargo Multifamily Capital www. opportunityzoneresourcecenter. com September 5, 2018
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