Opportunity Zone Magazine Opportunity Zone Magazine Volume 1, Issue 1 | Page 86

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OPPORTUNITY ZONE MAGAZINE | VOLUME 1
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ISSUE 1
behalf), QOZ fund promoters are subject to the same laws and
regulations as the rest of the private equity fund community.
The two-page IRS form 8996 is for self-certification that the
fund is and meets QOZ regulations for tax purposes — not a
license to widely raise money without regard to accreditation
or otherwise.
If you have owned a property for several years that
is now designated as being within a QOZ, you do not
automatically qualify for the tax benefits. To participate
in the tax benefits, the property must be acquired by an
unrelated party after Dec. 31, 2017. Unrelated is defined
as less than 20 percent ownership. So, as an existing land
or property owner, in general, you would need to sell to an
unrelated partnership, then buy back into that partnership
but for not more than 20 percent. You could then take the
balance of your gains from such sale and reinvest those in a
QOZ Fund.
If you have owned a property
for several years that is
now designated as being
within a QOZ, you do not
automatically qualify for the
tax benefits.
The step-up in basis of your original dollars in years 5
and 7, and the deferral of those payments until 2026,
while attractive, is not the primary incentive or benefit
of the program. The attractiveness of this program, from a
fund-level investor perspective, is that every dollar above your
potentially stepped-up basis (original investment) is tax-free from
federal income tax (and in many states, from state income tax),
if the investment is properly invested, executed, and held for at
least 10 years. Said another way, if you invest $1 million and 10
years later that $1 million generates an additional $3 million of
gains, your tax on that $3 million by Uncle Sam is zero.
To qualif y under the “substantial improvement ”
test, you cannot simply build a second stand-alone
building (like a hotel) of equal or greater value than
an existing building (like an office building) on the
site, if excess land exists. If the QOZ land has existing
vertical improvements, for example an office building,
the improvements must be made to those existing vertical
improvements for one dollar more than those existing
improvements (or rebuild for one dollar more than such
existing value, if you raze the building). However, if
the second building, for example a hotel, is connected
to and integrated with the existing building, it could
qualify as an improvement to the existing building for
purposes of meeting the substantial improvement test.
As an investor, you can invest your capital gains from
the sale of a recent property, asset or business — it is
not limited to the cash proceeds from such sale. If the
QOZ land has existing vertical improvements, for example
an office building, the improvements must be made to those
existing vertical improvements for one dollar more than those
existing improvements (or rebuild for one dollar more than
such existing value, if you raze the building). However, if
the second building, for example a hotel, is connected to and
integrated with the existing building, it could qualify as an
improvement to the existing building for purposes of meeting
the substantial improvement test.
You are not required to sell your interest or investment
in year 10 or 2029. The outside exit date is 2047. While you
have to hold the investment for at least 10 years to attain the
tax-free benefit of gains above your original investment, you
can continue to hold and create tax-free value until 2047.
Contrary to much of the rhetoric, this program is unlike
previous or existing government incentives designed to foster
community redevelopment — let’s give it a chance.
The aforementioned is based on the regulations and
clarifications issued by the Treasury Department in
October 2018.
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