LEGAL ISSUES


Opportunity Zone Program Continued from page 13


Nevertheless, based on the


guidance that has been issued, the following information can help you navigate through the Opportunity Zone Program requirements.


Capital Gains Deferral Under the Opportunity Zone


Program, taxpayers defer recognizing capital gains if, within 180 days of when such gains would otherwise be recognized, they make an equity investment in a Qualified Opportunity Fund. Te initial deferral does not last forever.


Once the fund interest is sold, or


on December 31, 2026, whichever is earlier, the investor pays tax on the lesser of: (i) the deferred capital gain, or (ii) the fair market value of the Qualified Opportunity Fund investment less its tax basis. Tis basis initially equals zero, but after five years, it increases by 10 percent of the capital gain deferred, and after 7 years, it increases another 5 percent. As a result, a taxpayer may permanently exclude up to 15 percent of capital gains invested in a Qualified Opportunity Fund, provided they acquire their fund interest before December 31, 2019. After 10 years, the tax basis in


the Qualified Opportunity Fund investment equals its fair market value on the date it is sold, such that there is no taxable gain on the sale. Tus, taxpayers may avoid tax on any post- acquisition appreciation of the fund investment. Te existing Opportunity Zone designations expire on December 31, 2028. Nevertheless, taxpayers investing in a Qualified Opportunity Fund on or before that deadline can claim the benefit of the 10-year basis step-up until December 31, 2047.


Qualified Opportunity Fund A newly formed, or pre-existing,


U.S. entity treated as a corporation or partnership for tax purposes (including LLCs) may elect to be a Qualified Opportunity Fund, provided its intent


14 March/April 2019


to invest in Opportunity Zones is stated in its organizing documents. Te fund must invest 90 percent of its assets in “Qualified Opportunity Fund Business Property” or “Qualified Opportunity Fund Businesses.” Te 90 percent test is measured by averaging the percentage of qualified property held by the fund six months after it is formed, and the last day of its taxable year.


Under the Opportunity Zone Program, taxpayers defer recognizing capital gains if, within 180 days of when such gains would otherwise be recognized, they make an equity investment in a Qualified Opportunity Fund.


Qualified Opportunity Fund


Business Property is tangible property purchased from an unrelated seller that is originally used in an Opportunity Zone, or that is substantially improved within 30 months. Improvements to property will be deemed “substantial” if they double its tax basis. In cases where property includes land, the purchase price allocated to land will not be counted in determining whether the property’s basis has doubled.


How Businesses Are Tied to Opportunity Zones


Qualified Opportunity Zone


Businesses are active businesses with certain ties to an Opportunity Zone,


including:  At least 70 percent of the tangible property owned or leased by the business is Qualified Opportunity Zone Business Property.


 At least 50 percent of total gross income of the business is derived


from the Opportunity Zone.


 A substantial portion of the intan- gible property of the business is used in an active trade or business in the Opportunity Zone.


 Less than 5 percent of the average aggregate unadjusted bases of the property of the business is nonqualified financial property, which, among other things, includes cash, cash equivalents or debt held by the business.


 Te trade or business of the entity is not certain “sin” businesses including a golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or a liquor store.


Safe Harbor Te proposed regulations provide a


safe harbor for cash held by a business, provided it is held pursuant to a written plan and schedule that desig- nates the cash as held for the purpose of acquiring, constructing, or substan- tially improving tangible property in the Opportunity Zone within 31 months, and the business substan- tially complies with the schedule. But this safe harbor is only currently extended to Qualified Opportunity Fund Businesses. It is still not clear if a similar safe-harbor rule will be extended to cash held at the fund level. Practical questions still exist


regarding the program, and investors will likely find that one or more issues exist for which there is no “certain” answer. However, current guidance makes investing in the program feasible.


Given the incentive under the


program to invest prior to the end of 2019, it is clear many investors will dive in before Treasury answers all of their questions. 


Julie Treppa is a tax partner in Farella Braun + Martel’s San Francisco office, where she develops tax planning strategies for corporations, nonprofits, partnerships and joint ventures.


California Constructor


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