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 - - PowerPoint PPT Presentation

R o b e r t W i e b e , C P A

Ro b e r t W @ w h h c p a s . c o m

B e n H u b b e ll, C P A

B e n H @ w h h c p a s . c o m

K E Y N O T E S P E A K E R S

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• 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

P R E S E N T A T I O N O U T L I N E

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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”

H I S T O R Y

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Best suited for creation of value

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H I S T O R Y

• 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

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H O W I T W O R K S

How it works

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F R E S N O Q O Z M A P

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

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QOZ P E R S T A T E

Interactive map available at:

www.novoco.co m/resource ‐ centers

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S T A T E C O N F O R M I T Y M A P

• Could have applied to gains realized as early

as June 25, 2017.

• Effective date of the law is

December 22, 2017

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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

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

C R I T I C A L D A T E S

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SALE 3/2/18 9/2/18 12/31/18 6/30/19 12/31/19 12/31/21 1/1/18 Partnership reinvestment date Partner reinvestment date Substantially improve property

YEAR END YEAR END

C R I T I C A L D A T E S

Must be capital gains. Can’t be ordinary gains from inventory property Can’t be ordinary in character such as 1245 depreciation recapture Can be short term holding period – subsequent recognition in future year maintains character Can’t be from a sale to a related party (using 20% instead of 50% definitions)

E L I G I B L E G A I N S

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Must be capital gains. Can’t be ordinary gains from inventory property Can’t be ordinary in character such as 1245 depreciation recapture Can be short term holding period – subsequent recognition in future year maintains character Can’t be from a sale to a related party (using 20% instead of 50% definitions)

• 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.

C R I T I C A L D A T E S

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+

Individuals Pass through entities S corporations Partnerships C corporation s Estate and trusts REITS

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E L I G I B L E T A X P A Y E R S

Individuals

• S corporations
• Partnerships

Pass through entities C corporations Estate and trusts REITS

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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

Q O F Q U A L I F I C A T I O N S

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E L I G I B L E I M P R O V E M E N T S

Can be real property or personal property Residential rental property Farming Property Commercial rental property

Taboo businesses “sin businesses”

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I N E L I G I B L E I M P R O V E M E N T S

• Suntan facility
• Racetrack or other gambling

facility

• Liquor store for consumption
• f alcohol off premises (bar

and restaurants OK

• Golf course or country club
• Massage parlor
• Hot tub facility

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E L I G I B L E I M P R O V E M E N T S

Tangible business property Acquired after 12/31/17 Original use property OR substantially improved by doubling the initial cost basis

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E X A M P L E S T U D Y

Factor 1031 OZ

Time to reinvest 45 day designation 180 days to close

• 180 days
• 180 days from EOY
• 30 months

Availability for state taxation Yes‐ CA No‐ CA Cash to reinvest Net sales price Gain only Like kind Yes No Personal property No Yes Deferral period on tax Until replacement property is sold 2026 with reduction Taxable gain on sale of property acquired Yes No Geographic limits None within US Only designated zones

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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

70% 90%

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E X A M P L E S T R U C T U R E

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

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QOF

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

On sale of real estate:

• Partial 1031 reinvestment
• Recognize boot
• Invest cash boot into new

QOF

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Combine 1031 & QOZ:

• 1031 into land
• Partnership Recognizes

boot/gain

• Qualify entity as QOF
• Partnership does not elect OZ
• Partner(s) elects OZ
• Partner contributes cash

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

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Bonus depreciation Excess business losses 199 Deduction Business interest expense limitation

O T H E R T A X R E F O R M T O P I C S

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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%
• r 70% tests
• 6. Clarification on working capital safe harbor for direct ownership
• f 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.

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T H A N K Y O U

Questions

RobertW@whhcpas.com BenH@whhcpas.com whhcpas.com