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Qualified Opportunity Zones & Funds

Qualified Opportunity Zones & Funds. This Presentation. What is a Qualified Opportunity Zone (“QOZ”), how and why were they created and where are they? What is an Opportunity Fund? What assets are eligible for investment?

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Qualified Opportunity Zones & Funds

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  1. Qualified Opportunity Zones & Funds

  2. This Presentation • What is a Qualified Opportunity Zone (“QOZ”), how and why were they created and where are they? • What is an Opportunity Fund? • What assets are eligible for investment? • What are the benefits of the new program and why is there so much interest about this new investment class? • Next steps? Where is the guidance?

  3. What is an Opportunity Zone • The Opportunity Zones Program was enacted as part of the 2017 tax reform package (Tax Cuts and Jobs Act ”TCJA”). The program is designed to drive long-term private capital to rural and low-income communities throughout the nation, and uses tax incentives to encourage private investment in Opportunity Funds. • An Opportunity Zone is a census tract nominated by its state’s governor and certified by the U.S. Department of the Treasury. It is an area in which economic development is desired. There are 8,700 available.

  4. What is an Opportunity Fund? • A new class of investment vehicles (organized as a corporation or partnership) that specializes in aggregating private investment and deploying that capital in Opportunity Zones to support Opportunity Zone Property. • A minimum of 90 percent of Opportunity Fund assets must be invested in Opportunity Zones. • The statute does not limit the number of funds that can be created, nor does it provide instructions on the nature of investments (risk/return profile). • Pooling capital through a fund structure provides an opportunity for a broad array of investors throughout the country to engage in the program.

  5. Opportunity Zone Property • Opportunity Funds are authorized to invest in Opportunity Zone Property, defined as. • Stock – any stock in a domestic corporation. • Any capital or profits interest in a domestic partnership. • Tangible property used in a trade or business that substantially improves the property. • What will the guidelines say about this?

  6. The Specific Benefits? The substantial tax advantages Opportunity Funds can provide to investors is rollover holdings and reinvest capital gains. • No upfront subsidy is provided to investors; all incentives are linked to the duration of the qualified investment. The provision has two main tax incentives to encourage investment. • Allows for the temporary deferral of inclusion in gross income for capital gains that are reinvested into Opportunity Funds. • Investors can roll existing capital gains into Opportunity Funds with no up-front tax bill. • If investors hold their Opportunity Fund investments for five years, the basis of their original investment is increased by 10% (meaning they will only owe taxes on 90 percent of the rolled-over capital gains). • If investors hold for seven years, the basis increases by a further 5 percent, to 15 percent.

  7. The Specific Benefits? Continued Option 2 • Opportunity Funds excludes from taxable income gains on Opportunity Fund investments held for at least 10 years. In other words, after settling the original tax bill, patient investors in Opportunity Funds will face no capital gains on their Opportunity Zone Investments. KEY TAKEAWAY Opportunity Funds allow investors to defer federal taxes on any recent capital gains until December 31, 2026, reduce that tax payment by up to 15%, and pay as little as zero taxes on potential profits from an Opportunity Fund if the investment is held for 10 years.

  8. How to Maximize Your Opportunity Zone Benefits • Invest in desired Opportunity Fund(s): • December 31, 2018 • Elect on tax filing to show capital gain rollover into an Opportunity Fund: • April 15, 2019 • Pay deferred capital gains tax: • April 15, 2027 • Sell Opportunity Fund(s) tax-free (eligibility begins on this day, after a 10-year hold): • December 31, 2028

  9. What Does the Guidance Need to Tell Us? • Is there going to be adequate time to redeploy capital? • What is the base of the 90% test? • What is the actual calculation, fair market value, cost basis, adjusted base or some other measure? • What qualifies as “Substantially all?” • “During substantially all of the holding period, substantially all of the use of the property was in a QOZ” • The term is defined in different ways in other Internal Revenue Code sections. • What is the extent of the 90% test penalty? • What are the implications of expanding beyond the QOZ? • How will leverage be treated? • Will QOZ stock and QOZ partnership interests be treated differently than QOZ business property? • Many more issues exist and will need to be clarified. • Where are we today.

  10. Adam YormackPartner Escalante Yormack Law, PLLC5201 Blue Lagoon Dr., 200 | Miami, FL 33126305.514.0046 | adam@eylawyers.com | eylawyers.com

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