Benefits of New Guidance;
• Extended 180 days period to make Qualified Opportunity Fund investment when gain is recognized at the flow through entity level.
• Character of original gain is retained through the deferral period.
• Working capital exclusion from 90% asset test.
• Substantial improvement application only to acquired building, and amount to be improved only needs to be 1x the acquisition cost allocated to the building.
• Acquisition of corporation stocks or partnership interests by the Quality Opportunity Fund must be equity interest, but the equity interest can be utilized as collateral for borrowing without triggering the recognition of the deferred gain.
Opportunity zones are identified by census tracts, both rural and urban, identified as particularly needing capital investment, chosen by the governors of the states and retain designation for 10 years.
http://dof.ca.gov/Forecasting/Demographics/opportunity_zones/
local opportunity Zones:
Tax Benefits:
Capital gain reporting is deferred to the earlier of the sale of the new QOZ investment or December 31, 2026.
Reportable gain is the lesser of the gain that was originally deferred or the fair market value of the asset as of the date above.
If asset held for more than five years, adjusted basis is increased by ten percent of the gain deferred.
If asset held for more than seven years, the basis increase goes up by another 5% to 15% of the gain deferred.
EXAMPLE;
Investor sells stock for $2M ($1M of long term capital gain) on July 1, 2018
Investor invests $1M in an interest in a QOZ Fund on November 1, 2018. Does not need to invest the entire $2M.
On pre determined date of December 31, 2026:
Investor’s tax basis in the QOZ Fund has increased by $150K (15% of $1M) $100K on November 1, 2023, and $50K on November 1, 2025. Investor has to pay tax on $850K long-term capital gain.
November 2, 2028:
Investment in the QOZ Fund has appreciated from $1M to $5M ($4M in potential gain). If the investment in the QOZ Fund is sold, then there is no taxable gain on the $4M of appreciation.
* Example only. Results and outcomes may vary.
POTENTIAL ISSUES;
There is a monthly penalty on taxpayers when a QOF’s investments in Qualified Opportunity Zone Property consist of less than 90% of the QOFs total assets.
A QOF’s assets are measured semi-annually at mid-year and year-end (i.e., June 31 and December 31 for calendar-year entities); and the two measurements are averaged to determine if the fund has satisfied the 90% standard.
Not all states will conform to the Opportunity Zone rules.
Most states have released explanations of how the federal provisions will conform under their respective laws.
California is one of 12 states yet to conform with the Opportunity Zone benefits for the tax year of 2018.
However California State Treasurer Fiona Ma, recently announced that she will support governor Gavin Newsom in his efforts to build more housing through the opportunity zone program.
Disclaimer; All material in this web site, including this post’s information are collected from different unverified sources, are for information purposes only. Results may vary on individual basis. For further details, please consult your tax professional or a tax attorney.
