Client Alert Fact Sheet: Federal Qualified Opportunity Zones
March 20, 2018
The following fact sheet has been prepared for investors (any individual or business with highly appreciated assets looking for a way to diversify their assets and mitigate capital gains); existing businesses looking to expand; real estate developers looking for long-term flexible equity investment; and fund managers experienced with connecting investors with capital projects.
Qualified Opportunity Zones are a subset of low income census tracts in each state (up to 25 percent), as designated by the Governors and the Unites States Treasury, in which individuals, corporations and partnerships are incentivized to invest in development and expansion of businesses by deferring, reducing and excluding certain capital gains associated with such investments.
Opportunity for Investors: Provides for deferred capital gains on appreciated property that is sold to make investments in qualified opportunity zones, as well as a 10 percent to 15 percent discount on such deferred capital gains, depending on the term the investment is held; in addition, provides an opportunity to exclude all capital gains on such new investments if such investments are held for at least 10 years; provides significant opportunity for investors to rebalance and diversify their holdings—investors in the U.S. hold over $2 trillion of unrealized capital gains (Source: New York Times).
Opportunity for Developers and Businesses Looking to Relocate or Expand: Flexible long-term equity investment for real estate projects and other businesses located in low income census tracts; unlike New Markets Tax Credits, the allocations for which are controlled by Community Development Entities, “qualified opportunity funds” need only be corporations or partnerships established to make investments in “qualified opportunity zone property,” as further described below.
Capital Gains Deferral Period: For capital gains reinvested in a “qualified opportunity fund,” as defined below, capital gains taxes are deferred until the earlier of December 31, 2026, or sale or exchange of the investment in the qualified opportunity fund.
Capital Gains Discount: A step-up in basis of 10 percent or 15 percent for such deferred gains if the new opportunity zone investment is held for 5 or 7 years, respectively.
No Capital Gains on Appreciated Opportunity Fund Investment if Held 10 Years: At the election of the taxpayer, the basis in an investment in a qualified opportunity fund is stepped up to the fair market value on the date of sale or exchange of such investment if it is held for at least 10 years.
Qualified Opportunity Funds: “Any investment vehicle which is organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (other than another qualified opportunity fund) that holds at least 90 percent of its assets in qualified opportunity zone property,” measured semi-annually. IRC § 1400Z-2(d).
Qualified Opportunity Zone Property: Either stock or a partnership interest in a business that owns “qualified opportunity zone business property,” or direct investment in the same (see IRC § 1400Z-2(d) for more detail).
Qualified Opportunity Zone Business Property: Tangible property used in a trade or business within a qualified opportunity zone if acquired or substantially improved after Dec. 31, 2017. Substantial improvement means at least doubling the basis in the property within 30 months of acquisition.
Enabling Legislation: Internal Revenue Code § 1400Z et seq., created under the Tax Cut and Jobs Act of 2017.
This Legal Alert is intended to keep readers current on matters affecting businesses and is not intended to be legal advice. This alert was prepared by Jonathan Cox, a member of Eckert Seamans’ Public Finance Group. For more information, contact Jonathan Cox at firstname.lastname@example.org or 717-237-7182, or Marc Stein, chair of the Public Finance Group, at email@example.com or 215-851-8464, or any other Eckert Seamans attorney with whom you work.