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What Is Opportunity Zone Tax Benefits

Which Option Is Best For You

Opportunity Zones: Will Tax Breaks for Investors Benefit Communities Too?

How do you decide which option is right for you and your investment strategy? Answering this question is easier with the help of a trusted investment advisor, CPA, or financial consultant. However, to help you get started, consider following a few guidelines:

1031 Like-Kind Exchanges Are Most Suitable For:

  • Active real estate investors. These investors should have the resources and / or expertise needed to maintain ongoing management.
  • Investors who have already received a gain from a piece of sold real estate or other qualifying asset.
  • Investors who do not need to access their principal capital.
  • Older investors who plan on leaving any assets acquired through a 1031 Exchange as part of their will.

Opportunity Funds Are Most Suitable For:

  • Passive investors who want to enjoy the benefits of professionally managed funds.
  • Passive investors who are interested in diversifying their portfolios.
  • Investors who have already received a gain from the sale of an asset, such as stocks, bonds, or real estate.
  • Investors who want to have access to their invested principal.
  • Investors who are planning on selling the investment within their lifetime.

Real estate can offer many unique benefits, including tax advantages. Working with a real estate expert can help you determine the type of real estate assets, and tax-deferred vehicle you should use to maximize your investment opportunities.

The Potential Tax Benefits Of Qofs

There are three possible income tax incentives for taxpayers interested in investing in a QOF: deferral, discount, and exemption. First, a taxpayer may defer recognizing capital gains from a sale of a capital asset if the capital gains are invested in a QOF within 180 days of the disposition of the property. By investing in a QOF, a taxpayer is able to defer recognition of their capital gains until either the QOF is sold, or December 31, 2026, whichever occurs first. A taxpayer may invest an amount greater than the eligible gain, but only the capital gain portion will be eligible for the tax benefits under the program.

Example 1Tiffany liquidates her portfolio in April 2020 and generates a $5 million long-term capital gain. She invests only the $5 million capital gain into a QOF in December 2020 . By investing in a QOF within 180 days, Tiffany may defer $1.19 million of capital gains tax that would have been payable on her 2020 income tax return.5,6

Next, a taxpayer may receive a potential discount upon recognition of the capital gains that were initially invested in the program. In general, depending on the timing of a taxpayer’s investment and the period the investment is held, up to 10% of the taxpayer’s rolled gain may be permanently exempt from taxation. Specifically, the cost basis of a QOF should increase by 10% after 5 years.

In 2025, Tiffany’s cost basis in the QOF should increase from zero to $500,000 because she would have held the QOF for 5 years.

California Recycle Underutilized Sites Program Offers Public Financing For Brownfield Sites

The California Recycle Underutilized Sites program offers public financing to help remediate and redevelop brownfield sites to help create housing and encourage other types of community development. The program has led to $3.7 billion of private and public housing investments, and the development of over 7,200 housing units, including approximately 3,600 affordable units. To do this, CALReUSE provides forgivable loans and grants, which can help fund both remediation and construction costs for development projects. Since many of these brownfield sites are located in Qualified Opportunity Zones , the program could easily help Opportunity Funds redevelop these sites to create profitable developments with a high level of community impact.

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The Tax Benefits Of Opportunity Zones

KEY TAKEAWAYS

  • Opportunity zones are a new tax benefit, established by the Tax Cuts and Jobs Act of 2017, designed to spur investment in economically distressed communities.
  • The tax benefits are two-fold: taxes owed on capital gains can be deferred, and in some cases reduced, if the gains are reinvested in an opportunity zone fund and the gains on opportunity zone investments held at least 10 years are tax free.
  • Investments in an opportunity zone are subject to many rules and restrictions, most of which are in two sets of proposed Treasury Department regulations.

Opportunity zones are a tax benefit created by the Tax Cuts and Jobs Act of 2017 to spur investment in economically distressed communities. In exchange for qualified investments in specific places, a taxpayer may defer and reduce taxes owed on capital gains and earn tax-free capital gains for opportunity zone investments held at least 10 years.

How Investing In Opportunity Zones Works

What is an Opportunity Zone? Tax Benefits &  More Explained [Free Guide]

The designation of Opportunity Zones is designed to help spur development of identified communities. In exchange for investing in Opportunity Zones, investors can access capital gains tax incentives available exclusively through the Opportunity Zone program. To access these tax benefits, investors must invest in Opportunity Zones specifically through Opportunity Funds. A qualified Opportunity Fund is a US partnership or corporation that intends to invest at least 90% of its holdings in one or more qualified Opportunity Zones. As previously mentioned, Opportunity Funds are governed by IRC section 1400Z-2 and Opportunity Funds can self-certify to the IRS. But each Opportunity Fund is responsible for ensuring that they abide by the guidelines of the Opportunity Program in order to be able to offer tax incentives.

Because the Opportunity Zone program is intended to stimulate positive growth within designated communities, there are restrictions on the types of investments in which an Opportunity Fund can invest. These investments are called Qualified Opportunity Zone property, which is defined as any one of the following:

  • Partnership interests in businesses that operate in a qualified Opportunity Zone.
  • Stock ownership in businesses that conduct most or all of their operations within a qualified Opportunity Zone.
  • Property such as real estate located within a qualified Opportunity Zone.

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Tax Benefit #: Temporary Capital Gains Tax Deferral

The first tax benefit that investors can enjoy is a temporary deferral of inclusion in taxable income. This deferral is only applicable for capital gains that are reinvested in an Opportunity Fund. Additionally, the deferred gain must be recognized before the opportunity zone investment expires or before December 31, 2026.

What Is Opportunity Zone

Opportunity zones are a tax benefit created by the Tax Cuts and Jobs Act of 2017 to spur investment in economically distressed communities. In exchange for qualified investments in specific places, a taxpayer may defer and reduce taxes owed on capital gains and earn tax-free capital gains for opportunity zone investments held at least 10 years.

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How Were They Selected

The Governors Office and ADECA used an objective methodology that involved input from a variety of resources to determine areas where the program could be most effective. Methods used in the selection process included a county-by-county examination of previous designations as advantage sites or industrial sites, a review of aerial imagery for development activities by ADECAs Geographical Information Systems Unit and data and research compiled by federal, state and local organizations.

Governor Ivey submitted Alabamas nominations for Opportunity Zones to the U.S. Department of the Treasury on March 20, 2018. The zones were approved by the Treasury Department and the IRS on April 18, 2018.

More information about Opportunity Zones in Alabama is available at OpportunityAlabama.com.

Qualified Opportunity Zone Business

Who gets the tax benefits of ‘opportunity zones?

Each taxable year, a QOZ business must earn at least 50% of its gross income from business activities within a QOZ. The regulations provide three safe harbors that a business may use to meet this test. These safe harbors take into account any of the following:

  • Whether at least half of the aggregate hours of services received by the business were performed in a QOZ
  • Whether at least half of the aggregate amounts that the business paid for services were for services performed in a QOZ or
  • Whether necessary tangible property and necessary business functions to earn the income were located in a QOZ.

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How Pwc Can Help

PwC can provide a complete suite of tax, assurance, and advisory services related to all phases of an opportunity zone fund investment lifecycle. We help with identifying qualifying opportunity zone investments, assisting in structuring opportunity zone investments to accomplish the specific goals of investors , advising on the operation of the opportunity zone investments, and the investors eventual exit from the opportunity zone investment. Our offerings include:

  • Identifying avenues for taxpayers to utilize the Opportunity Zone Program
  • Identifying various Opportunity Zone Fund structures for consideration and assisting with the implementation of the selected structure
  • Confirming that an investment in an Opportunity Zone Fund qualifies for the benefits of the program
  • Determining if state and local tax benefits may also be available
  • Ongoing tax consulting and compliance related to the status of the Opportunity Zone Fund and its tax operations
  • Assisting in the disposition of Opportunity Zone Fund qualifying properties and interests in Opportunity Zone Funds

What Is A Qualified Opportunity Zone

A QOZ is an economically distressed area where new investments, meeting specific criteria, may be eligible for preferential tax treatment. QOZs have been selected based on a nomination process managed by each state and submitted to the Treasury Secretary for final selection. There are currently 327 opportunity zones in Illinois with 133 located within the greater Chicagoland area.

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Qualified Opportunity Zones: What Investors Should Know

Key takeaways:

  • The 2017 Tax Cuts and Jobs Act established the Qualified Opportunity Zone program to provide a tax incentive for private, long-term investment in economically distressed communities.
  • Investors in these programs are given an opportunity to defer and potentially reduce tax on recognized capital gains.
  • Tax savings are only available when investors retain the investment in the Qualified Opportunity Fund for the time frame stated.

What this may mean for you:

  • If you are facing a significant tax liability as a result of capital gains, investing in a Qualified Opportunity Fund may be worth exploring, provided you invest within a prescribed amount of time.

The Opportunity Zone Program In New York State

What is an Opportunity Zone? Tax Benefits &  More Explained [Free Guide]

New York State is participating in the new Opportunity Zone community development program, offered through the Tax Cuts and Job Acts of 2017. The federal program encourages private investment in low-income urban and rural communities. Based on analyses by Empire State Development , New York State Homes and Community Renewal , New York State Department of State and the states Regional Economic Development Councils , New York State has recommended 514 census tracts to the U.S. Department of the Treasury for designation as Opportunity Zones.

to view the list of the 514 approved and designated tracts.

Use the map below to view approved and designated tracts:

Q: What is an Opportunity Zone?A: An Opportunity Zone is a low-income census tract with an individual poverty rate of at least 20 percent and median family income no greater than 80 percent of the area median.

Q: What is the benefit of an Opportunity Zone?A: An Opportunity Zone can receive funds from Opportunity Funds. Opportunity Funds provide investors the chance to put that money to work rebuilding the low to moderate income communities. The fund model will enable a broad array of investors to pool their resources in Opportunity Zones, increasing the scale of investments going to underserved areas.

Q: How many Opportunity Zones may a state nominate?A: Each state may nominate a minimum of 25 total eligible census tracts but no more than 25 percent of the total number of eligible census tracts within the state.

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What Is A Qualified Opportunity Fund

A Qualified Opportunity Fund is a U.S. partnership or corporation that will invest at least 90 percent of its holdings in one or more Qualified Opportunity Zones. There are three types of investments that can qualify:

  • Partnership interests in businesses that operate in a qualified Opportunity Zone.
  • Stock ownership in businesses that conduct the majority of their operations within a qualified Opportunity Zone.
  • Property, such as factory equipment or real estate, that is located within a qualified Opportunity Zone.
  • RealWealth is excited about this new investment opportunity, available to our members. We believe that real estate investments offered under Opportunity Funds can provide new advantages that are not available in most other real estate investments. Remember, there are certain requirements and certifications that Qualified Opportunity Funds must meet. Some of these requirements and certifications include:

    • Certified by the U.S. Treasury Department.
    • Organized as either a corporation or partnership that has the purpose of investing in Qualified Opportunity Zone Property.
    • Hold at least 90 percent of their assets in Qualified Opportunity Zone Property.
    • Qualified Opportunity Zone property includes newly issued stock, partnership interests, or business property in a Qualified Opportunity Zone.
    • Opportunity Fund investments are limited to equity investments in businesses, real estate, and business assets that are located in a Qualified Opportunity Zone.

    About The Opportunity Zone Program

    The OZ Program is a federal tax incentive program intended to promote investments in economically distressed communities across the country. Through the program, investors can inject capital into low-income communities and promote long-term economic growth through a variety of investment vehicles. Investors may also be eligible for significant tax benefits that include tax deferral for capital gain invested in a qualified opportunity fund elimination of up to 15% for historic investments of the tax on the capital gain that is invested in the QOF and potential full elimination of tax when exiting a QOF investment.

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    Where Are Opportunity Zones Located And How Are They Created

    Opportunity zones are dispersed throughout the country and represent 11% of all U.S. census tracts. Spread throughout a mix of urban, industrial, suburban and rural areas, opportunities zones are home to over 30 million people. You can view an interactive map of qualifying opportunity zones on the U.S Department of Housing and Urban Development website.

    Individual states, in collaboration with local governments, were able to nominate a specific geographic area for the Qualified Opportunity Zone program through March 21, 2018. These areas were required to meet certain low-income requirements, among other criteria. The actual certification as an opportunity zone comes from the IRS.

    Qualified Opportunity Zone Property

    What Are Opportunity Zones?

    QOZ property is a QOF’s qualifying ownership interest in a corporation or partnership that operates a QOZ business in a QOZ or certain tangible property of the QOF that is used in a business in the QOZ. To be a qualifying ownership interest in a corporation or partnership,

  • the interest must be acquired after December 31, 2017, solely in exchange for cash
  • the corporation or partnership must be a QOZ business and
  • for 90% of the holding period of that interest, the corporation or partnership was a QOZ business.
  • See Form 8996 instructions.

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    Whats The Difference Between Investing In An Opportunity Zone And A Section 1031 Exchange

    When you invest in an opportunity zone or fund, you can tap into tax-deferral options. Additionally, you can enjoy tax-free growth in perpetuity if you reach the 10-year milestone in your investment.

    Unlike an opportunity zone or opportunity fund investment, Section 1031 exchanges only defer taxes so the investment can continue to grow. But outside of an opportunity zone, capital gains taxes will come due whenever the property is sold.

    For example, lets say you invest $100,000 in an opportunity fund. You enjoy the tax deferral options along the way. But you choose to hold onto the investment for 10 years. At that point, you can sell the property and will only have to pay taxes on capital gains created by your initial investment. Plus, even these can be reduced through a step-up basis of up to 15%.

    On the flip side, if you pursue a Section 1031 exchange, youll have to pay capital gains taxes when you eventually sell your property.

    Where Are Opportunity Zones Located

    There are 8,764 opportunity zones in the U.S., which represent 12% of all census tracts. Many of the regions designated as opportunity zones have suffered from a lack of investment for decades and can be found on an interactive map shown on the U.S Department of Housing and Urban Development website. Just over 23% of opportunity zones are in rural areas.

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    How To Invest In Qualified Opportunity Funds

    Establishing a QOF is not a simple task. For that reason, most investors choose to take advantage of the Opportunity Zone tax incentives by placing their qualified capital gains into an existing QOF investments run by an institution. Like any professionally managed fund, these QOFs manage the underlying investments with the goal of generating returns for their investors.

    Opportunity Zones: An Overview Of The Benefits And Requirements

    What is an Opportunity Zone? Tax Benefits &  More Explained [Free Guide]

    Opportunity zones have received a flurry of interest from every corner of the real estate industry, and many are diving in before the IRS has answered key questions about how to structure the investment. The effect of opportunity zone deferral and basis adjustment tax benefits is to enhance the rate of return on a project, thereby making otherwise unfeasible or unfinanceable projects work. While those with substantial capital gain stand to benefit the most, anyone with a long-term investment horizon may stand to benefit from the opportunity. This guide is a resource for those in the real estate industry and should not be construed as tax or legal advice without further consultation with Larsson & Scheuritzel P.C.

    The opportunity zone statute that was enacted as part of the Tax Cuts and Jobs Act allows all taxpayers to avail themselves of tax benefits that include temporary tax deferral and the possibility of complete and permanent exclusion of some taxable income. The statute required guidance from the IRS to make the statute usable, and the IRS issued its first set of guidance in late 2018. Below is a very brief summary of benefits of the program and what someone wanting to benefit from the program would need to know. You can access a PDF version of this guide here.

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