Tax ex­perts weigh in on Qual­i­fied Op­por­tu­nity Zones

Their ver­dict: This cre­ation of the Tax Cuts and Jobs Act of­fers sig­nif­i­cant ben­e­fits to in­vestors

Accounting Today - - Taxpractice - By Roger Rus­sell See QOZ on 27

Qual­i­fied Op­por­tu­nity Zones, added as new Sec­tion 1400Z to the Tax Code by the Tax Cuts and Jobs Act, of­fer sig­nif­i­cant ben­e­fits to in­vestors seek­ing to de­fer or abate their cap­i­tal gains.

The zones, or “low-in­come com­mu­ni­ties” (as the term is de­fined in Sec­tion 45D of the code for New Mar­kets Tax Cred­its) are des­ig­nated by cen­sus tracts. The gover­nors of each state des­ig­nated up to 25 per­cent of such tracts in their state, and they could also choose up to 5 per­cent of tracts that are not low-in­come com­mu­ni­ties but are con­tigu­ous to low-in­come com­mu­ni­ties.

Although the pro­posal was slipped into the TCJA with­out much fan­fare, in­ter­est in the pro­vi­sion has quickly grown.

“In­ter­est in Qual­i­fied Op­por­tu­nity Zones is off the charts,” said Dustin Stam­per, man­ag­ing di­rec­tor in the Wash­ing­ton na­tional tax of­fice of Top 6 Firm Grant Thorn­ton. “Now that the pro­posed reg­u­la­tions are out, we have enough rules to start mak­ing in­vest­ments.”

“Congress has put in­cen­tives in the code be­fore to en­cour­age in­vest­ments in geo­graphic ar­eas, but this is the most gen­er­ous tax in­cen­tive this type ever of­fered,” he said. “The tax ben­e­fits of QOZS are three­fold: Tax­pay­ers get to de­fer cap­i­tal gain, then they get some of the de­ferred gain for­given if they hold the in­vest­ment for five to seven years, and then on top of that, if they hold it for 10 years, they rec­og­nize no ad­di­tional gain at all from the in­vest­ment.”

In­vestors gen­er­ally have to pay tax on the de­ferred gain when they sell the in­vest­ment, but manda­tory gain has to be rec­og­nized at the end of 2026 even if they haven’t sold it, he ex­plained: “So if they want the 15 per­cent for­given for hold­ing the in­vest­ment for seven years, they have to make the in­vest­ment be­fore the end of 2019.”

Help for the down­trod­den

“The Op­por­tu­nity Zone Pro­gram was cre­ated to en­cour­age those with longterm cap­i­tal gains to in­vest in down­trod­den neigh­bor­hoods, and it is one of the biggest things I’ve seen in my 37-year ca­reer,” said Wil­liam Pro­cida, founder and chief ex­ec­u­tive of Pro­cida Fund­ing. “Im­prov­ing low-in­come, high-crime ar­eas is and has been among the most im­por­tant is­sues fac­ing our coun­try. This pro­gram will bring bil­lions of dol­lars to these com­mu­ni­ties with­out the gi­gan­tic red tape of prior gov­ern­ment-sub­si­dized pro­grams. The trick for in­vestors will be how to ac­tu­ally im­ple­ment these in­vest­ments.”

“We were hop­ing that pro­posed guid­ance would say that if you get into 2020, you still have the op­por­tu­nity for the ben­e­fits of a seven-year de­fer­ral, but you don’t — the de­fer­ral pe­riod lasts un­til Dec. 31, 2026,” said Paul Gev­ertz­man, a tax part­ner at Top 100 Firm Anchin. “As you get closer to 2026, you lose some of the ben­e­fits.”

The pro­posed reg­u­la­tions, which came out on Oct. 19, 2018, are gen­er­ally fa­vor­able to tax­pay­ers, Stam­per ob­served. “They al­low ei­ther part­ners or the part­ner­ship it­self to make the in­vest­ment and de­fer gain,” he said. “In ad­di­tion, the regs ruled that land will be qual­i­fied and doesn’t have to meet the orig­i­nal use re­quire­ment, be­cause by na­ture land is per­ma­nent. There are a hand­ful of im­por­tant ques­tions that these regs don’t ad­dress. These will be an­swered in the next round of pro­posed reg­u­la­tions, which will be is­sued shortly.”

“Left open is the ques­tion as to when the idea of orig­i­nal use can ap­ply to a build­ing that is va­cant, aban­doned or un­der-uti­lized. The pre­am­ble to the regs said the IRS is will­ing to make some ac­com­mo­da­tion, but we just don’t know how much un­til they come out with ad­di­tional guid­ance,” he added. “Another ques­tion is how to treat the gain when a fund it­self sells some of its as­sets. Most peo­ple are hop­ing that the gain wouldn’t be rec­og­nized if the fund rein­vests in equal as­sets, but that’s not clear from the statute or the pro­posed regs.”

“These zones are ev­ery­where — more than 8,700 zones have been des­ig­nated,” he said. “Ev­ery ma­jor city has ar­eas that qual­ify. It’s a huge op­por­tu­nity.”

‘Like wild­fire’

“Qual­i­fied Op­por­tu­nity Zones have taken off like wild­fire across the county,” agreed Jim Lang, a share­holder in the Tampa of­fice of law firm Green­berg Trau­rig. “In­ter­est has ex­ploded na­tion­wide. When the first round of pro­posed regs was re­leased, that in­creased in­ter­est even more.”

The idea for Qual­i­fied Op­por­tu­nity Zones grew out of a pro­gram spon­sored by Sen­a­tors Tim Scott, R-S.C., and Corey Booker, D-N.J. The in­vest­ment can be su­per­charged by pair­ing it with cred­its such as the Af­ford­able Hous­ing and Low In­come Hous­ing Cred­its, and the New Mar­ket Tax Credit.

Qual­i­fied Op­por­tu­nity Zones can be used for non-real es­tate in­vest­ments, which is no longer the case with Sec­tion 1031 like-kind ex­changes, noted Roger Har­ris, pres­i­dent of Pad­gett Busi­ness Ser­vices. “And un­like a Sec­tion 1031 ex­change, you have the op­por­tu­nity to pull money out,” he ob­served.

“Un­der the pro­posed reg­u­la­tions, a QOZ busi­ness may re­tain cash, cash items, and cer­tain debt as rea­son­able work­ing cap­i­tal for up to 31 months with­out caus­ing a fail­ure of the 90 per­cent as­set test,” said Jay Blaivas, a part­ner in the fed­eral tax prac­tice group of law firm Mor­ri­son Fo­er­ster. “They make it clear that a part­ner in a part­ner­ship may de­fer its share of qual­i­fy­ing cap­i­tal gains of the part­ner­ship by rein­vest­ing the

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