Terms about the Zone
Founded in 2019
Terms included in the regulations that provide guidance under new section 1400Z-2 of the Internal Revenue Code (Code) relating to gains that may be deferred as a result of a taxpayer’s investment in a qualified opportunity fund (QOF). Specifically, the proposed regulations address the type of gains that may be deferred by investors, the time by which corresponding amounts must be invested in QOFs, and the manner in which investors may elect to defer specified gains.
The opportunity zone vernacular is full of acronyms.
QOF: Qualified Opportunity Zone Fund or Qualified Opportunity Fund (“QOF”), An investment vehicle that is set up as either a partnership, S-Corp or corporation for investing at least 90% of its assets in eligible property (see “Opportunity Zone Property”) that is located in an Qualified Opportunity Zone that utilizes the investor’s gains from a prior investments (e.g., held in a brokerage account) in an unlimited amount, from the sale or exchange of any property (whether or not the asset sold was located in or related to a low-income community).
QOZP: Qualified Opportunity Zone Property (“QOZP”), is a property that is (i) qualified opportunity zone stock, (ii) qualified opportunity zone partnership interest, or (iii) qualified opportunity zone business property.
QOZB: Qualified Opportunity Zone Business, A trade or business (i) in which substantially all of the tangible property owned or leased by the entity is Opportunity Zone Business Property, and (ii) which (a) derives at least 50% of its gross income from the active conduct of a trade or business, (b) uses a substantial portion of any intangible property in such trade or business, and (c) has less than 5% of its assets invested in non-qualified financial property. A trade or business will not qualify as an Opportunity Zone Business if it is engaged in owning or operating any 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.
QOZBP: Qualified Opportunity Zone Business Property, Tangible property used in a trade or business of a Qualified Opportunity Fund if such property (i) was acquired by purchase after December 31, 2017, (ii) the original use of such property in the Qualified Opportunity Zone commences with the Qualified Opportunity Fund or the Qualified Opportunity Fund substantially improves the property, and (iii) substantially all of the use of such property was in a Qualified Opportunity Zone during substantially all of the Qualified Opportunity Fund holding period for the property.
Qualified Opportunity Zone Partnership Interest Qualified Opportunity Zone Property also includes certain interests in a partnership, with requirements substantially identical to those applicable to Opportunity Zone Stock but which would apply when the business is organized as a partnership rather than a corporation.
Qualified Opportunity Zone Program The 2017 tax reform reconciliation act (the Act), enacted December 22, 2017, includes a new tax incentive program, Internal Revenue Code Sub-chapter Z – Opportunity Zones, aiming to promote investments in certain economically distressed communities.
Qualified Opportunity Zone Stock Stock of any domestic corporation (i) acquired by the Opportunity Fund after December 31, 2017, at original issuance solely in exchange for cash, and (ii) which, at the time such stock is issued and during substantially all of the Opportunity Fund’s holding period, is a Qualified Opportunity Zone Business (“QOZB”).
More TERMS to Consider
Under Section 1031 of the United States Internal Revenue Code (26 U.S.C. § 1031), a taxpayer may defer recognition of capital gains and related federal income tax liability on the exchange of certain types of property, a process known as a 1031 exchange. In 1979, this treatment was expanded by the courts to include non-simultaneous sale and purchase of real estate, a process sometimes called a Starker exchange.
The 90-Percent Test is applied by taking the average of the percentage of qualified opportunity zone property held by the QOF (1) on the last day of the first six-month period of the taxable year of the QOF and (2) on the last day of the taxable year of the QOF.
A blind pool is a limited partnership that raises funds from investors with no specific investment thesis. Typically managed by a general partner, the blind pool’s goal is broadly defined as growth or income, perhaps with a focus on a specific sector or sectors, but provides the general partner decision making autonomy in the allocation of capital.
Census Tracts (Opportunity Zone)
The U.S. Department of the Treasury in 2018, certified 8,766 individual census tracts across all 50 states, six territories, and the District of Columbia as Opportunity Zones. 294 Opportunity Zones contain Native American lands and nearly a quarter (23.2 percent) are in rural areas. These communities were chosen by governors from the wider universe of qualifying low income census tracts. Governors selected tracts that on the whole demonstrated far more distress across nearly every available social and economic measure than the eligible tracts they bypassed.
Community Development Financial Institutions Fund (CDFI Fund)
Promotes economic revitalization in distressed communities throughout the United States by providing financial assistance and information to community development financial institutions (CDFI).
Low-income community census tracts are the basis for determining eligibility in Qualified Opportunity Zones.
Economically Distressed Community
See Distressed Areas
Economically distressed communities designated by the government for aid—but this aid is intended primarily to lift the communities out of poverty by stimulating business enterprise and creating jobs.
FMV Basis Election
If an investor holds its interest in the QOF for 10 years or more, for purposes of determining the gain or loss the investor recognizes from the sale or exchange of such QOF interest, the investor may elect for the basis of such QOF interest to be equal to its fair market value on the date such QOF interest is sold or exchanged.
Intangible personal property is something of individual value that cannot be touched or held.
Low Income Housing Tax Credits
Created in 1986 and made permanent in 1993, is an indirect federal subsidy used to finance
the construction and rehabilitation of low-income affordable rental housing.
Low-Income Community Census Tracts
A low-income community census tract has an individual poverty rate of at least 20% and median family income up to 80% percent of the area median [Section 45D(e)].
New Market Tax Credits
Designed to increase the flow of capital to businesses and low-income communities by providing a modest tax incentive to private investors.
Non-Like Kind Investment
In order to qualify as an investment in a QOZ, capital obtained by the sale of assets to provide liquidity for investment in a QOZ do not have to be like-kind assets. For example, an investor can sell stocks or precious metals and still reap the benefits of QOZ investment if he or she invests in a business or real property in a QOZ.
Nonqualified Financial Property
Nonqualified financial property’’ is defined in §1397C(e) as debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities, and other similar property.
An Opportunity Zone is an economically-distressed community (see also “low-income communities”) where new investments, under certain conditions, may be eligible for preferential tax treatment.
Opportunity Zone vs. New Market Tax Credits
Although there are similarities between the Opportunity Zone Program and the New Markets Tax Credit program, a crucial difference will be in underwriting the potential financial success of the low-income community businesses in which an Opportunity Fund invests.
For purposes of Qualified Opportunity Zone Program, if the taxpayer has not sold the qualified investment by December 31, 2026, the inclusion of the deferred gain may result in phantom gain at that time.
Phantom Gain Date
12/31/26. At this date, the deferred capital gain must be recognized. All or part of the deferred gain is includible in taxable income when the taxpayer sells the investment in the Qualified Opportunity Fund or on December 31, 2026, whichever occurs first.
February 2, 2017: The Investing in Opportunity Act is introduced in the Senate and House.
December 22, 2017: The Tax Cuts and Jobs Act of 2017 — which includes a modified version of the Investing in Opportunity Act — is signed into law, enacting the Opportunity Zones tax incentive.
January 1, 2018: The first date in which property may be acquired by purchase to qualify as eligible Qualified Opportunity Zone property.
June 14, 2018: Treasury finalizes certification of Opportunity Zones in all 50 states, 5 overseas territories, and the District of Columbia. There are 8,762 Opportunity Zones throughout the nation.
October 19, 2018: The first set of proposed regulations is issued by the IRS.
December 14, 2018: Treasury certifies two additional Puerto Rican Opportunity Zones, bringing the total number of OZs to 8,764.
February 14, 2019: The first IRS public hearing on Qualified Opportunity Funds.
April 17, 2019: The second set of proposed regulations is issued by the IRS.
June 28, 2019: The final date to invest capital gains recognized in 2018.
July 9, 2019: The second IRS public hearing on Qualified Opportunity Funds.
December 31, 2019: The final date to receive the full tax benefit of Opportunity Zone investing. After this date, the 15% step-up in basis after a 7-year hold goes away, as it is no longer possible to achieve a 7-year hold prior to the end of 2026.
June 27, 2020: The final date to invest capital gains recognized in 2019.
June 28, 2021: The final date to invest capital gains recognized in 2020.
December 31, 2021: The final date to receive any basis step-up on the original gain. After this date, the 10% step-up in basis after a 5-year hold goes away, as it is no longer possible to achieve a 5-year hold prior to the end of 2026.
June 28, 2022: The final date to invest capital gains recognized in 2021.
June 28, 2023: The final date to invest capital gains recognized in 2022.
June 27, 2024: The final date to invest capital gains recognized in 2023.
June 28, 2025: The final date to invest capital gains recognized in 2024.
June 28, 2026: The final date to invest capital gains recognized in 2025.
December 31, 2026: Original deferred gain is recognized.
April 15, 2027: Tax payments due on original deferred gain.
June 28, 2027: The final date to invest capital gains recognized in 2026, making this the final deadline to invest in a Qualified Opportunity Fund in order to achieve the 10-year gain exclusion.
2028: The first year in which some of the earliest Opportunity Zone investments may be sold and qualify for the 10-year gain exclusion.
December 31, 2028: Statutory expiration of the designation of Qualified Opportunity Zones. (It is unclear what, if any, material effect this will have on the incentive.)
June 28, 2037: The earliest date on which the last Opportunity Zone investments may be sold and qualify for the 10-year gain exclusion.
December 31, 2047: The final date to dispose of an Opportunity Zone investment (or possibly the final date to elect a basis step-up, rules still pending) in order to achieve a basis step-up to fair market value, thereby eliminating capital gains.
Qualified Opportunity Fund Certification
To become a Qualified Opportunity Fund, an eligible taxpayer self-certifies. As of now, no approval or action by the IRS is required.
Qualified Opportunity Zone
See Opportunity Zone
Generally speaking, related party issues are technical and we recommend consulting with your CPA or tax attorney to understand how the “related party” rules may impact your specific situation.
Qualified Opportunity Zone Business Property (“QOZBP”) is substantially improved for this the purpose if during any 30-month period following acquisition of such property there are additions to a basis that equal the adjusted basis as of the beginning of such 30-month period.
Tangible personal property is everything other than real estate that is used in a business or rental property.
Tax Cuts and Jobs Act
A congressional revenue act originally introduced in Congress as the Tax Cuts and Jobs Act (TCJA). Public law no. 115-97 ("the Act") amended the Internal Revenue Code of 1986 based on tax reform advocated by congressional Republicans and the Trump administration.
Working capital is the difference between a firm’s current assets (e.g. cash, accounts receivable, inventory) and current liabilities (accounts payable, other liabilities due within one year). Working capital measures a company’s liquidity and efficiency in its operations. Firms with high levels of working capital are in an advantageous position to invest in current operations or expand the capacity of future operations via capital expenditure.