OPPORTUNITY ZONES
By Mike Pruter
T
he 2017 Tax Cuts and Jobs Act that went into effect February 2018 contains a new program called “opportunity zones,” which incentivizes investments and job creation in economically distressed communities. This past October, the U.S. Treasury Department unveiled a number of new rules and regulations designed to provide clarity and answer lingering questions about the tax implications of investing in these newly designated areas, of which there are 879 in California alone. An Opportunity Zone is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. The Tax Cuts and Jobs Act, signed into law in December 2017, created a new tax incentive program that encourages investors to make longterm financial investments in Qualified Opportunity Zones (QOZs). In exchange, the investor receives a number of benefits related to the deferral of capital gains taxes. The first step to realizing the tax benefits of investing in a QOZ is to invest capital gains resulting from a sale or exchange in 16 SAN DIEGO LAWYER January/February 2019
a Qualified Opportunity Fund within 180 days of the sale or exchange. A Qualified Opportunity Fund is an investment vehicle organized as a corporation or a partnership that uses the gains from a prior investment. This short, 180-day timeline may prove challenging for investors, who will have to figure out the best way to acquire or repurpose their properties and assets within this short window. One is not eligible for the benefits afforded by the Opportunity Zone program if the investment into the Fund occurs after this 180-day window. The Qualified Opportunity Fund must hold 90 percent of its assets in QOZ Property, or a penalty is paid for failing to meet this requirement. An exception to this rule can be made if it is shown that failure to maintain the 90 percent requirement is due to reasonable cause. The three main incentives for taxpayers to invest their gains in QOZs are to defer recognition of capital gains, to eliminate recognition of up to 15 percent of these capital gains, and to potentially eliminate recognition of all capital gains upon the sale or exchange of a Fund investment.
These Qualified Opportunity Funds are very different than traditional funds, and investors will have to be creative to structure them correctly to comply with the codes in place. There are three different types of properties that qualify as QOZ Property: • Qualified Opportunity Zone Stock is stock in a U.S. corporation that is a QOZ Business • Qualified Opportunity Zone Partnership Interest is any capital or profits interest in a U.S. partnership that is a QOZ Business • Qualified Opportunity Zone Business Property is tangible property used in a trade or business of a Qualified Opportunity Fund All three types must be acquired solely for cash, must have been a QOZ Business when acquired, and must qualify as a QOZ Business during substantially all of the Fund's holding period. A QOZ Business is defined as any trade or business that meets all of the following requirements: • At least 70 percent of the tangible property it owns or leases was