Horizons Spring/Summer 2019

The second provision, Section 1400Z-2, laid out three federal income tax incentives for taxpayers who invest capital within one of these zones.

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In summary, these incentives include:

∙ Temporary deferral of capital gains to the extent they are invested in qualified opportunity funds (QOF) ∙ Partial exclusion of a portion of the previously deferred gains if the taxpayer holds the investment for specified holding periods ∙ Permanent exclusion of gains from appreciation on the original investment in the QOF if the investment is held longer than ten years These provisions have excited real estate developers looking for capital to close challenging deals, investors looking for socially conscious investments that yield tax benefits, community and governmental leaders looking to bring economic growth to their communities, and other various professionals gaining expertise to advise their clients. These individuals see a bright future of conducting profitable business while effecting positive social change and economic growth in low-income communities. The future is also cloudy though, as the provisions themselves contain little practical guidance on how to implement the program and to date only one set of proposed treasury regulations and a revenue ruling have been issued. It is helpful to examine the timeline of the program as an overview. To start, eligible taxpayers will have recognized eligible gains. Eligible taxpayers include individuals, C corporations, partnerships, S corporations, trusts and estates. This definition also includes owners of pass-through entities if the pass- through entities themselves do not elect to defer the gain in question. Overview & Timeline of Opportunity Zones

Eligible gains are “capital gains” for federal tax purposes recognized before January 1, 2027, that do not arise from a sale or exchange with a related party. The related party threshold is set at no more than 20% related. These eligible taxpayers must reinvest the eligible capital gain as equity into a QOF within 180 days from the date of recognition. In cases where a pass-through entity does not elect to reinvest the gain, the owners of the pass- through entity may elect to do so instead. The 180-day period would then begin on one of two dates, which is at the option of the taxpayer, either the last day of the pass- through entity’s tax year in which the gain occurred or the actual day of the of the gain. Once invested in the QOF, the taxpayer is able to begin deferring the gain from taxes. A QOF may be organized as a corporation or partnership and is a vehicle for deploying the capital received from investors into a QOZ. The QOF deploys capital either by acquiring or substantially improving qualified tangible property directly or acquiring ownership of a qualified opportunity zone business (QOZB) that acquires the qualified tangible property. Either must be acquired with cash from an unrelated party after December 31, 2017, be used in a QOZ and adhere to other requirements to qualify for the program. A QOF also must meet various timing and asset tests. For purposes of the timeline, a QOF must begin meeting its asset tests at the earlier of six months after electing to be treated as a QOF or on the last day of the first year in which electing to be treated as a QOF.

Spring/Summer 2019

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