K E Y N O T E S P E A K E R S R o b e r t W i e b e , C P A B e n H u b b e ll, C P A Ro b e r t W @ w h h c p a s . c o m B e n H @ w h h c p a s . c o m 2
P R E S E N T A T I O N O U T L I N E 1. History 2. How it works 3. Effective Date 4. Eligible Gains 5. Eligible Taxpayers 6. Opportunity Fund Qualifications 7. Eligible Improvements 8. Example of OZ fund investments 9. Comparison of 1031 & Opportunity Zone 10. Other Tax Reform Topics 3
H I S T O R Y History Free enterprise zones introduced in the 1980 by Margaret Thatcher as program for • industrial & commercial renewal of blighted areas • Jack Kemp introduced legislation in the 1980s for tax incentives 1993 congress established empowerment zones and enterprise communities • • Latest program is new Market Tax credit program • Now a Qualified Opportunity Fund Mitch McConnell: “Creative solution to problems of creating jobs in rural areas, small cities and suburbs” 4
H I S T O R Y Best suited for creation of value 5
H O W I T W O R K S • Capital gains are realized • Invest cash equal to gain into Qualified Opportunity Fund (“QOF”) • The gain realized is not recognized until December 31, 2026 • Avoid recognition of taxable gain on appreciation of investment in QOF if held for at least 10 years 6
How it works F R E S N O Q O Z M A P 7
QOZ P E R S T A T E Graphic courtesy of Tax Notes, May 14, 2018. The CDFI Fund’s complete list of eligible tracts is available at Rev. Proc. 2018 ‐ 16, sections 3.04 through 3.06 8
S T A T E C O N F O R M I T Y M A P Interactive map available at: www.novoco.co m/resource ‐ centers 9
C R I T I C A L D A T E S I M P A C T A V A I L A B I L I T Y • Could have applied to gains realized as early as June 25, 2017. • Effective date of the law is December 22, 2017 10
C R I T I C A L D A T E S Taxpayer has 180 days from sale to reinvest gain into QOZ fund If the tax payer is a partnership/S corp and a partnership does not elect, then the partners have 180 days from the last day of the tax year to reinvest gain into QOZ fund 11
C R I T I C A L D A T E S 9/2/18 12/31/18 6/30/19 12/31/19 12/31/21 1/1/18 3/2/18 0 Substantially SALE Partnership Partner YEAR END YEAR END improve reinvestment reinvestment property date date 12
E L I G I B L E G A I N S Can’t be ordinary gains Can’t be ordinary in Must be capital gains. Can’t be ordinary gains Can’t be from a sale to a from inventory property related party (using 20% Must be capital gains. instead of 50% definitions) from inventory character such as 1245 Can’t be ordinary in character such as 1245 property depreciation recapture depreciation recapture Can be short term holding period – subsequent recognition in future year maintains character Can be short term Can’t be from a sale to holding period – a related party (using subsequent recognition 20% instead of 50% in future year definitions) maintains character 13
C R I T I C A L D A T E S After 5 years • 10% exclusion of gain occurs • After 7 years 15% exclusion of gain occurs • As of 12/31/2026 remaining 85 or 90% deferred gain is recognized • After 10 years gain on sale of investment is permanently tax free. 14
E L I G I B L E T A X P A Y E R S + Individuals Individuals Pass through entities Pass through entities • S corporations S corporations • Partnerships Partnerships C corporation s C corporations Estate and trusts REITS Estate and trusts REITS 15
Q O F Q U A L I F I C A T I O N S Partnership or a corporation Existing entities qualify if QOZ property is acquired post 12/31/17 Fund self certifies by filing a form 8996 Own 90% of assets as Qualified opportunity zone property Investment of QOF in subsidiary entity only requires 70% of subs assets to be qualified property Has 31 months for future improvements 16
E L I G I B L E I M P R O V E M E N T S Can be real Residential Commercial property or Farming rental rental personal Property property property property 17
I N E L I G I B L E I M P R O V E M E N T S Taboo businesses “sin businesses” • Golf course or country club • Suntan facility • Massage parlor • Racetrack or other gambling • Hot tub facility facility • Liquor store for consumption of alcohol off premises (bar and restaurants OK 18
E L I G I B L E I M P R O V E M E N T S OR substantially Tangible Acquired Original use improved by business after property doubling the property 12/31/17 initial cost basis 19
E X A M P L E S T U D Y 20
1 0 3 1 E X C H A N G E S V S O P P O R T U N I T Y Z O N E S Factor 1031 OZ Time to reinvest 45 day designation • 180 days 180 days to close 180 days from EOY • • 30 months Availability for state Yes ‐ CA No ‐ CA taxation Cash to reinvest Net sales price Gain only Like kind Yes No Personal property No Yes Deferral period on tax Until replacement 2026 with reduction property is sold Taxable gain on sale of Yes No property acquired Geographic limits None within US Only designated zones 21
E X A M P L E S T R U C T U R E 90% This image cannot currently be displayed. 70% 22
P O T E N T I A L O R G A N I Z A T I O N S T R U C T U R E QOF Loan 20 Building 80 QOF Investor 70 Land 20 GP 10 Total 100 Total 100 General Partner QOF Investor (s) Distribution waterfall % of operating cash flow % of cash on capital event 23
P L A N N I N G O P T I O N S I N A P A R T N E R S H I P Combine 1031 & QOZ: On sale of real estate: • 1031 into land • Partial 1031 reinvestment • Partnership Recognizes • Recognize boot boot/gain • Invest cash boot into new • Qualify entity as QOF QOF • Partnership does not elect OZ • Partner(s) elects OZ • Partner contributes cash 24
O T H E R T A X R E F O R M T O P I C S Bonus Excess business depreciation losses Business 199 Deduction interest expense limitation 25
U N A N S W E R E D Q U E S T I O N S 1. Rules for personal property 2. Rules for improvement to unimproved land 3. Definition of a reasonable period for reinvestment of proceeds from asset sales and distributions from subsidiaries 4. Leasing of property from related parties 5. Potential valuation of a lease for purposes of meeting the 90% or 70% tests 6. Clarification on working capital safe harbor for direct ownership of QOZ business property 7. Active trade or business – rental real estate presumably meets criteria 8. Meaning of “substantial” in the various contexts within the code. Not defined in each paragraph referenced. 26
T H A N K Y O U Questions RobertW@whhcpas.com BenH@whhcpas.com whhcpas.com 27
Recommend
More recommend
