Opportunity Zone Tax Attorney
Opportunity Zones—probably the most used word of 2018 in terms of the real estate industry. Opportunity zone investing presents a very unique opportunity for investors, individuals, and businesses alike to defer paying tax on capital gains earned in a given year, by reinvesting such proceeds into government-designated census tracts.
Three Main Benefits of the Opportunity Zone Investment Strategy:
(1) First is the deferral of your capital gains that you timely reinvest into an “Opportunity Zone Fund” until the earlier of the time you sell your interest in such fund or December 31, 2026;
(2) Second is the ability to reduce the total amount of tax you will have to pay on the capital gains reinvested when they later become recognizable—this can be either a 10% or 15% reduction depending on your investment timing;
(3) Third, final, and most importantly is the opportunity to avoid paying tax on the appreciation of your initial investment into an “Opportunity Zone Fund”, so long as you hold onto your investment in the fund for 10 or more years.
Requirements of the Opportunity Zone Investment
While the benefits of this program are immense, the requirements to be eligible for the program’s benefits are nuanced and not well understood by non-tax accountants and attorneys.
First, it is a misnomer to think that you can swoop up a parcel of property or begin a small operating business in an opportunity zone and automatically qualify for the program’s benefits. That is very far from the truth. Opportunity zone investors must have a qualifying capital gain, of which they make a qualified reinvestment within 180-days of recognizing such gain. Additionally, the reinvestment must be into an “Opportunity Zone Fund”, which is a corporation or partnership that must meet a myriad of annual and semi-annual testing thresholds.
The most important item for investors to glean from this short synopsis is that not all capital gains qualify for this treatment, the reinvestment must be timely (which is also subject to a number of exceptions), and you must truly be investing into a qualified “Opportunity Zone fund”, which requires due diligence on your part to ensure that it truly qualifies.
On the other side of this equation are the requirements imposed upon entities that wish to qualify as an “Opportunity Zone Fund”. These funds must meet three general requirements—
(1) The entity must be self-certified as qualifying as an “Opportunity Zone Fund” which requires the filing of Form 8996 with a timely filed tax return;
(2) The entity must be organized as a partnership or a corporation;
(3) At least 90% of the fund’s assets must be invested in “qualified opportunity zone property”.
The first two qualifications are rather self-explanatory, it is really the third that requires the most strategy and planning to meet. This 90% test is based upon a bi-annual test that averages the percentage of assets held by the fund as “qualified opportunity zone property”. The value of the assets for purposes of this 90% test can be based upon either the values provided by an audited financial statement or their tax cost basis.
What Is a “Qualified Opportunity Zone Property”
Well, it can be many things but includes the following:
- The stock or ownership interests of a qualifying subsidiary or tangible property used in a trade (or business if it was acquired after 2017)
- Its original use commenced with the fund or the fund “substantially improved” the property
- The property was primarily located in a designated opportunity zone
Each of these items—qualifying subsidiary stock or ownership interest and qualifying tangible property—have their own myriad of qualifications and requirements that need to be met in order to qualify for purposes of the 90% asset test applicable to an “Opportunity Zone Fund”.
Our experienced attorneys at Evolution Tax and Legal are well versed in helping those interested in investing and taking advantage of the opportunity zone program. Our lawyers can review the capital gains you have received, determine whether they qualify or not for purposes of the program, and help with the due diligence of your fund of choice to ensure that you are placing your investment with a qualifying fund.
Additionally, our team has vast experience in structuring funds that would otherwise qualify as an “Opportunity Zone Fund” and take on investor dollars to reinvest into one of these qualifying areas. Please contact our team if you are interested in learning more about this “opportunity.”