Federal Tax Reform Opportunity Zones

August 2018

What are Opportunity Zones or O-Zones?

Tax reform legislation presented a significant opportunity for investors to defer capital gains tax owed. The benefits are for those capital gains that arose in the last 180 days or prospectively in 2018 and future years.
The establishment of newly created Federal Opportunity Zones (“O-Zones”) was added to the Internal Revenue Code as new IRC Sections 1400Z-1 and 1400Z-2. The O-Zones offer an opportunity for investors to defer tax on capital gains by investing in Qualified Opportunity Funds (“O-Funds”), which in turn make investments in property (stock, partnership interest or tangible personal property) in the designated O-Zones.
 

What are Opportunity Funds or O-Funds?

O-Funds are investment vehicles (partnerships or corporations) created for the main purpose of reinvesting monies realized from an event triggered by a sale resulting in a capital gain within those designated O-Zones. As of July 31, 2018 regulations have not yet been published by the Treasury or the IRS.
 

Who qualifies for O-Zones?

Each state has nominated low-income census tracts and subsequently approved by the Treasury. All U.S. States, the District of Columbia, and five territories have qualifying census tracts now available to qualify for investment.

Per the Internal Revenue Bulletin 2018-28 issue by the Internal Revenue Service on July 9, 2018, they have designated 8,849 census tracts, with California being the highest with 882 and ten states each with 25 tracts.
 

What are the benefits to be gained?

  • Any tax due on capital gains invested in the O-Fund within the 180-days is deferred until the fund is divested, or December 31, 2026, whichever occurs first.
  • If investment in O-Fund is held at least 5 years, there will be a 10 percent basis step up, while if the investment is held at least 7 years, the basis step up will be 15 percent.
  • If the investment in the O-Fund is held for at least 10 years, the taxpayer is exempt from paying any capital gain on the sale of the newly created O-Fund investment.
  • The new program offers a deferral of short or long-term capital gains tax due, a potential reduction of short and long-term capital gains tax due, and lastly a potential permanent exclusion from taxable income for any capital gains generated in any qualified investment made in the O-Funds.
 

How can BDO help?

The extensive knowledge and resources of our Credits & Incentives practice and our Real Estate practice make BDO uniquely positioned to assist in structuring opportunity zone funds and to help with making investments within the designated zones.
 

CONTACT:
 
Marla Miller
Tax Managing Director
  Grant Keppel
Tax Managing Director

   
Dan Fuller
Tax Partner