National Housing & Rehabilitation Association Spring Developers Forum

Transcription

1 National Housing & Rehabilitation Association Spring Developers Forum May 7-8, 2018 Marina del Rey, CA Sponsors:

2 Leveraging Qualified Opportunity Zones: Development & Finance Strategies Laura Burns Eagle Point Companies Fred Copeman Boston Financial Investment Management Kristin DeKuiper Holland & Knight LLP Michael Novogradac Novogradac & Company

3 Opportunity Zones Introduction Benefits of the Opportunity Zones Tax Incentives Qualified Opportunity Zones Qualification and Status Qualified Opportunity Funds What are the rules, how do you qualify? Direct and indirect investment in Qualified Opportunity Zone Business Property Qualified Opportunity Zone Business Property

4 Taxpayers can get capital gains tax deferral (& more) for making timely investments in Qualified Opportunity Funds (QOFs) which invest in Qualified Opportunity Zone Property

5 3 Tax Incentive Benefits Gain Deferral Partial forgiveness Forgiveness of additional gains

6 Sample Investment Jan. 2, 2018 Taxpayer enters into a sale that generates $1M of capital gain June 30, 2018 (Within 180 days), Taxpayer contributes entire $1M of capital gain to a Qualified Opportunity Fund Taxpayer is deemed to have a $0 basis in its QOF investment QOF Invests the $1MM in Qualified Opportunity Zone Property

7 Sample Investment June 30, 2023 (After 5 years), Taxpayer s basis in investment in QOF increases from $0 to $100k June 30, 2025 (After 7 years), Taxpayer s basis in investment in QOF increases from $100k to $150k Dec. 31, 2026 $850K of the 1MM of deferred capital gains are taxed and the basis in QOF investment increases to $1MM. June 30, 2028 (10 years later), Taxpayer sells investment for $2.0MM. Basis is deemed to be FMV. Thus, no tax on appreciation

8 Opportunity Zone Incremental Benefit Standard After Tax IRR Total IRR 10.00% 9.00% 8.00% 8.08% 7.95% 7.71% 9.08% 7.00% 6.00% 6.00% 6.00% 6.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 5 Year 7 Year 12/31/ Year 23.8% Tax Rate 5 Year 7 Year 12/31/ Year Standard After Tax IRR 6.00% 6.00% 6.00% 6.00% Incremental OZ Benefit 2.08% 1.95% 1.71% 3.08% OZ Investment IRR 8.08% 7.95% 7.71% 9.08% Percentage Increase 35% 32% 29% 51%

9 Perishability of Incentives 3.50% 3.00% 3.08% 2.96% 2.74% 2.61% Incremental IRR 2.50% 2.00% 1.50% 2.25% 2.09% 1.91% 1.74% 1.00% 0.50% 0.00% Year of QOF Initial Investment

10 Taxpayers can get capital gains tax deferral (& more) for making timely investments in Qualified Opportunity Funds (QOFs)

11 Qualified Opportunity Fund Statutory Requirements Purpose Certification Assets Test Noncompliance Penalty Certification Process

12 Qualified Opportunity Fund - Purpose An investment vehicle organized as a corporation or a partnership for the purpose of investing in Qualified Opportunity Zone Property (QOZP).

13 Certification Process IRS announces self-certification process for QOFs Self-certification form to be attached to tax return Form to be published summer 2018

14 Qualified Opportunity Fund Assets Test Must hold at least 90% of assets in QOZP, determined by the average of the percentage of QOZP held on: The last day of the first six month period of the fund s taxable year, and The last day of the fund s taxable year June 30th December 31st JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC

15 Qualified Opportunity Fund Noncompliance Penalty Failure to meet 90% investment standard Per month penalty for failing to meet 90% test x % shortfall underpayment rate penalty No penalty if it is shown failure is due to reasonable cause (Federal short-term rate plus 3%) currently 4%

16 Taxpayers can get capital gains tax deferral (& more) for making timely investments in Qualified Opportunity Funds (QOFs) which invest in Qualified Opportunity Zone Property

17 Qualified Opportunity Zone Property (QOZP) Qualified Opportunity Zone Partnership Interest Qualified Opportunity Zone Stock Qualified Opportunity Zone Business Property

18 Qualified Opportunity Zone Stock and Partnership Interests The investment must be acquired after December 31, 2017 in exchange for cash; Must be a qualified opportunity zone business, or is being organized for the purpose of being a qualified opportunity zone business; Must remain a qualified opportunity zone business for substantially all of the qualified opportunity fund s holding period

19 Qualified Opportunity Zone Businesses (QOZB) A trade or business in which substantially all of the tangible property owned or leased by the taxpayer is qualified opportunity zone business property (QOZBP) and: At least 50% of income derived from Active Conduct Substantial portion of intangible property used in active conduct of business < 5 percent unadjusted basis of property is nonqualified financial property

20 QOZB: Excluded Businesses Can t be a Sin Business A private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.

21 Qualified Opportunity Zone Business Property (QOZBP) Tangible property used in a trade or business Acquired by purchase from an unrelated party (20% standard) after December 31, 2017 During substantially all of holding period, substantially all the use is in a QOZ Original use in the QOZ commences with the taxpayer OR Taxpayer substantially improves the property during any 30-month period after acquisition, additions to basis exceed an amount equal to the adjusted basis of such property at the beginning of such period

22 ~8,000 Opportunity Zones (11%) Currently Designated Opportunity Zones As of 4/18/2018 Low-income community Opportunity Zone

23 Qualified Opportunity Zones Initial deadline was March 21, could be extended to April 20

24 Qualified Opportunity Zones CDFI Fund Opportunity Zones Mapping Tool:

25 Questions?

26 Leveraging Qualified Opportunity Zones: Development & Finance Strategies Laura Burns Eagle Point Companies Fred Copeman Boston Financial Investment Management Kristin DeKuiper Holland & Knight LLP Michael Novogradac Novogradac & Company