K E Y N O T E S P E A K E R S

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2 K E Y N O T E S P E A K E R S R o b e r t W i e b e, C P A Ro b e r t w h h c p a s. c o m B e n H u b b e ll, C P A Be n w h h c p a s. c o m 2

3 P R E S E N T A T I O N O U T L I N E 1. History 2. How it works 3. Effective Date 4. Eligible Gains 5. Eligible Taxpayers 6. Opportunity Fund Qualifications 7. Eligible Improvements 8. Example of OZ fund investments 9. Comparison of 1031 & Opportunity Zone 10. Other Tax Reform Topics 3

4 H I S T O R Y History Free enterprise zones introduced in the 1980 by Margaret Thatcher as program for industrial & commercial renewal of blighted areas Jack Kemp introduced legislation in the 1980s for tax incentives 1993 congress established empowerment zones and enterprise communities Latest program is new Market Tax credit program Now a Qualified Opportunity Fund Mitch McConnell: Creative solution to problems of creating jobs in rural areas, small cities and suburbs 4

5 H I S T O R Y Best suited for creation of value 5

6 H O W I T W O R K S Capital gains are realized Invest cash equal to gain into Qualified Opportunity Fund ( QOF ) The gain realized is not recognized until December 31, 2026 Avoid recognition of taxable gain on appreciation of investment in QOF if held for at least 10 years 6

7 How F R E it S N works O Q O Z M A P 7

8 QOZ P E R S T A T E Graphic courtesy of Tax Notes, May 14, The CDFI Fund s complete list of eligible tracts is available at Rev. Proc , sections 3.04 through

9 S T A T E C O N F O R M I T Y M A P Interactive map available at: m/resource centers 9

10 C R I T I C A L D A T E S I M P A C T A V A I L A B I L I T Y Could have applied to gains realized as early as June 25, Effective date of the law is December 22,

11 C R I T I C A L D A T E S Taxpayer has 180 days from sale to reinvest gain into QOZ fund If the tax payer is a partnership/s corp and a partnership does not elect, then the partners have 180 days from the last day of the tax year to reinvest gain into QOZ fund 11

12 C R I T I C A L D A T E S 1/1/18 3/2/18 9/2/18 12/31/18 6/30/19 12/31/19 12/31/21 0 SALE Partnership reinvestment date YEAR END Partner reinvestment date YEAR END Substantially improve property 12

13 E L I G I B L E G A I N S Must be capital gains. Can t be ordinary gains from inventory property Must be capital gains. Can t be ordinary in character such as 1245 depreciation recapture Can be short term holding period subsequent recognition in future year maintains character Can t be from be a sale to ordinary a gains related party (using 20% instead of 50% definitions) from inventory property Can t be ordinary in character such as 1245 depreciation recapture Can be short term holding period subsequent recognition in future year maintains character Can t be from a sale to a related party (using 20% instead of 50% definitions) 13

14 C R I T I C A L D A T E S After 5 years 10% exclusion of gain occurs After 7 years 15% exclusion of gain occurs As of 12/31/2026 remaining 85 or 90% deferred gain is recognized After 10 years gain on sale of investment is permanently tax free. 14

15 E L I G I B L E T A X P A Y E R S + Individuals Individuals Pass through entities S corporations Partnerships C corporations S corporations Partnerships Estate and trusts Pass through entities C corporation s REITS Estate and trusts REITS 15

16 Q O F Q U A L I F I C A T I O N S Partnership or a corporation Existing entities qualify if QOZ property is acquired post 12/31/17 Fund self certifies by filing a form 8996 Own 90% of assets as Qualified opportunity zone property Investment of QOF in subsidiary entity only requires 70% of subs assets to be qualified property Has 31 months for future improvements 16

17 E L I G I B L E I M P R O V E M E N T S Can be real property or personal property Residential rental property Farming Property Commercial rental property 17

18 I N E L I G I B L E I M P R O V E M E N T S Taboo businesses sin businesses Golf course or country club Massage parlor Hot tub facility Suntan facility Racetrack or other gambling facility Liquor store for consumption of alcohol off premises (bar and restaurants OK 18

19 E L I G I B L E I M P R O V E M E N T S Tangible business property Acquired after 12/31/17 Original use property OR substantially improved by doubling the initial cost basis 19

20 E X A M P L E S T U D Y 20

21 Factor 1031 OZ Time to reinvest 45 day designation 180 days to close Availability for state Yes CA No CA taxation Cash to reinvest Net sales price Gain only Like kind Yes No Personal property No Yes Deferral period on tax E X C H A N G E S V S O P PO R T U N I T Y Z O N E S Until replacement property is sold 180 days 180 days from EOY 30 months 2026 with reduction Taxable gain on sale of property acquired Yes No Geographic limits None within US Only designated zones 21

22 This image cannot currently be displayed. E X A M P L E S T R U C T U R E 90% 70% 22

23 P O T E N T I A L O R G A N I Z A T I O N S T R U C T U R E QOF Loan 20 Building 80 QOF Investor 70 Land 20 GP 10 Total 100 Total 100 General Partner QOF Investor (s) Distribution waterfall % of operating cash flow % of cash on capital event 23

24 P L A N NI N G O P T I O N S I N A P A R T N E R S H I P On sale of real estate: Partial 1031 reinvestment Recognize boot Invest cash boot into new QOF Combine 1031 & QOZ: 1031 into land Partnership Recognizes boot/gain Qualify entity as QOF Partnership does not elect OZ Partner(s) elects OZ Partner contributes cash 24

25 O T H E R T A X R E F O R M T O P I C S Bonus depreciation Excess business losses 199 Deduction Business interest expense limitation 25

26 U N A N S W E R E D Q U E S T I O N S 1. Rules for personal property 2. Rules for improvement to unimproved land 3. Definition of a reasonable period for reinvestment of proceeds from asset sales and distributions from subsidiaries 4. Leasing of property from related parties 5. Potential valuation of a lease for purposes of meeting the 90% or 70% tests 6. Clarification on working capital safe harbor for direct ownership of QOZ business property 7. Active trade or business rental real estate presumably meets criteria 8. Meaning of substantial in the various contexts within the code. Not defined in each paragraph referenced. 26

27 T H A N K Y O U Questions RobertW@whhcpas.com BenH@whhcpas.com whhcpas.com 27