Washington, D.C., 10/19/18--A Federal law established a set of economic incentives to revitalize underserved communities: Opportunity Zones.
On Friday, October 19, 2018, the Treasury Department issued highly-anticipated draft regulations for the Opportunity Zones Program: "an Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service. The list of designated Qualified Opportunity Zones can be found in IRS Notices 2018-48 https://www.irs.gov/pub/irs-drop/n-18-48.pdf (PDF) and in 2019-42 https://www.irs.gov/pub/irs-drop/n-19-42.pdf (PDF)." The Program allocates up to $6 trillion in capital gains for investment in "under-served" communities, under-served communities defined and as selected by governors in all 50 states, territories and the District.
As one analyst explained:
"Assume an investor has a $1 million gain in Apple stocks and decides to sell. To keep it simple, let's also assume the investor is in a 20 percent tax bracket, totaling $200,000 in capital gains tax. But instead of paying, the investor reinvests the $200,000 in an Opportunity Fund.
If the investor holds for more than 10 years: the investor pays ZERO capital gains tax on the appreciation of that asset."
These benefits are only available through the Opportunity Zone program, as we describe and discuss.
According to the IRS, "Opportunity Zones are designed to spur economic development by providing tax benefits to investors." Opportunity Zone Funds are the financial vehicle used to make investments in Opportunity Zone areas and "investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%. Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged." , and only capital gains are eligible for deferral under the Opportunity Zones legislation. Regulations issued by the IRS "make it easier for funds to ensure that they are complying with a requirement that they have 90 percent of their assets invested in opportunity zones."
As noted in the regulations, "A partnership or a partner can be the 'taxpayer' for purposes of investing in a Qualified Opportunity Fund....the partnership (or other pass-through entity) must first make an election with respect to making a qualified Opportunity Zones investment, and only if the partnership declines to make a qualified Opportunity Zones investment can individual partners use gain attributed to them to make a qualified Opportunity Zones investment." This grants significant corporate benefits to investors: Qualified Opportunity Fund investors will use corporate entities as a liability shield.
Qualified Opportunity Funds self-certify. The Internal Revenue Service has created a form for that purpose.
Opportunity Zone Property. (Click this link to go directly to the class.)
"Qualified Opportunity Zone business property is tangible property acquired by the Opportunity Zone Fund, the investor, after December 31, 2017 and either the original use of such property needs to start with the Opportunity Zone Fund investment or the Opportunity Zone Fund must substantially improve the property. Substantial improvement is defined "as additions to the property's basis (basis is generally the amount of your capital investment in property for tax purposes), during any 30-month period after acquisition, at least equal to the adjusted basis at the beginning of such period. Additionally, the use of such property needs to be in a qualified Opportunity Zone for substantially all of the Opportunity Zone Fund's holding period."
Opportunity Zones Explained. (Click this link to go directly to the class.)
The Tax Cuts and Jobs Act, passed in 2017, created new tax incentives for investments in what are known as Opportunity Zones: targeted areas in the United States. Investments are made via Qualified Opportunity Funds, who are directed to promote economic development in 8,700 disadvantaged rural and urban (read Native, African American and Hispanic) communities (low-income census tracts selected by state governors and certified by the U.S. Treasury Department) by offering investors substantial federal tax advantages.
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