You can invest in other communities
(and others can invest in ours)
The following are Vicki Markussen’s notes from the meeting.
Opportunity Funds are private sector investors putting at least 90% of their capital into Opportunity Zones. The idea: encourage investors who are hanging onto $6 trillion in wealth to pull from stock market into communities that need it.
Taxpayers who sell an asset, have 180 days to invest those gains into a Qualified Opportunity Fund (QOFs) that invest in a Qualified Opportunity Zone Property. By doing so, they get capital gains tax deferral, partial forgiveness and forgiveness of additional gains.
- 10% of the deferred gain is permanently forgiven if held for 5 years
- another 5% is forgiven if held for 7 years (prior to 12/31/2026)
- If held for 10 years, the group is entitled to FMV basis step-up whereby all appreciation to value is excluded
Dec. 31, 2026 is the hard end to this program. This means to get the full 7 year deferral and 15% forgiveness on the original tax bill, you have to have it into a fund by Dec. 31, 2019
The assets can be anything subject to capital gains — mutual funds, stock, property, equipment sales, etc. You can enter into the fund earlier than Dec. 31, 2019 – the importance is you’ve put it in within 180 days and then the fund has its own timeline to get the fund into qualified property.
Accountants need to track secondary investment.
Why Invest in an Opportunity Zone
- Improve our Communities
- Temporary Deferral of Capital Gains
- Potential for Reduced Tax Liability on Deferred Capital Gains
- Permanent Exclusion of Additional Capital Gain Recognition of Appreciated Investment
These align with census tracks. The City of La Crosse applied and Census Tract 2 and Census Tract 4 are now approved as Opportunity Zones. These have high poverty rates as a percentage of the population and lower households. Home ownership is low. The unemployment rate is higher, and high school diplomas are lower. They tend to not have a bachelor’s degree.
Qualified Opportunity Fund:
An investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (QOZP). The fund self-certifies by filling out a form and attaching it to a tax return.
Only the capital gains qualify for the special treatment so only the capital gains need to be reinvested. There is no requirement for like-kind as long as they are invested in the fund.
Every six months at least 90% of its assets need to be invested in Opportunity Zone properties.
- There is a per-month penalty unless there is a reasonable cause.
- They are determining when there will be funds that will lose certification or have a penalty.
Type of Funds
Proprietary Funds – Single Investor with one or more investments into QOZ Properties
- Pros: Timing and coordination of gains; Investment Strategy
- Cons: May have limited investment equity
Single Asset Funds – Single QOZ Property with one or more Investors
- Pros: Underwriting; “Club Fund”
- Cons: Timing and coordination of gains; Variable investment strategies
Multi-Investor Funds – Multiple investors & multiple QOZ Properties
- Pros: Diversification
- Cons: Securities rules; Investment tracing; Timing and coordination of gains
Qualified Opportunity Zone Property (QOZP) Stock & Partnership Interest
- The investment must be acquired after December 31, 2017 in exchange for cash
- Property has to be invested in exchange for cash.
- Must be a company that is 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 holding period
Qualified Opportunity Zone Business (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
Not: golf course, country club, massage parlor, hot tub, suntan, racetrack, selling alcohol.
Qualified Opportunity Zone Business Property (QOZBP)
- Tangible property used in a trade or business
- Acquired by purchase from an unrelated party (20% standard) after Dec. 31
- During substantially all of the holding period, substantially all the use is in a QOZ
- Original use in the QOZ commences with the taxpayer OR the taxpayer substantially improves the property (during any 30-month period after acquisition, additions to the basis exceed an amount equal to the adjusted basis of such property at the beginning of such period.
Can invest back into own business.
There is no requirement to invest into affordable housing or other community benefit-type projects.
Readily Identifiable Investment Types in Opportunity Zones
- Commercial Real Estate Development and Renovation in Opportunity Zones
- Opening New Businesses in Opportunity Zones
- Expansion of Existing Businesses into Opportunity Zones
- Large Expansions of Businesses already within Opportunity Zones
- No “like kind” requirement
- No qualified intermediary necessary
- 180 days to reinvest
- No initial property identification necessary
- Benefits to tax payer in additional to deferral
- No continuous deferral -taxes on original gain must be paid in April 2027
- Potential cash flow issues when taxes are due
Takeaways for Real Estate Developers
- New construction in an OZ works well
- Renovations of existing structures must meet substantial improvement test
- Potential that “original use” test could be applied to vacant structures
- If the QOZB is an operating company, the company may only need to locate in an OZ but not construct or substantially improve a structure
- OZ capital can be layered with other financing incentive
Takeaways for Municipalities
- Know your Opportunity Zones and the assets in them
- Add OZ notifications on any marketing materials for city-owned real estate in OZs
- Consider alignment with Tax Increment Districts
- Communicate with core developers and corporate stakeholders about OZ benefits
- Consider facilitating a local fund for local projects
- Consider creating a dedicated OZ webpage
Takeaways for Small Business
- Source of capital for expansion/relocation
- Restrictions on eligible businesses
- Tangible property
- Intangible property
- Sin businesses
- Active conduct
- Must remain in OZ for substantially all of the holding period
- How to attract OZ investment
- Issues with selling equity interests
Takeaways for Lenders
- Tax due in 2027 with no corresponding cash event = lending opportunity
- Guidance for bank customers
- Pair with OZ funds to provide complete package