Opportunity Zone investments have the potential to generate more than double the after-tax profits compared to a standard taxable portfolio.
What is an Opportunity Zone?
Introduced by the Tax Cut and Jobs Act of 2017, “Opportunity Zones” are low-income census tracts designated by state and federal government. Qualifying investments in these tracts may be eligible for preferential tax treatment if made through existing capital gains.
What is the purpose of Opportunity Zones?
Opportunity Zones are an economic development tool — that is, they are designed to spur economic development and job creation in distressed communities.
Interest in Opportunity Zones since they were announced - Google Trends
What is a Qualified Opportunity Fund?
An investment vehicle that invests a certain percentage of its assets in Qualified Opportunity Zones (percentage threshold varies depending on how investments are structured, but generally 70%+). Investors that reinvest capital gains into a Qualified Opportunity Fund can receive meaningful tax breaks including capital gains deferral, a substantial step up in tax basis, and tax abatement of all post-investment appreciation. Unlike the 1031 exchange program that has long been used to defer real estate-related taxable gains, eligible capital gains are not limited to real estate and can include gains from stocks and business or personal assets.
Florida Map showing Opportunity Zones across the State. Pease ask for information on ANY Opportunity Zone / Area / City / County / State across the US. We will provide you with detailed information without obligation; just let us know.
What types of investments can be made through a Qualified Opportunity Fund?
Investments are required to be equity investments in businesses or real estate in within an Opportunity Zone. Most real estate investments will be subject to a “substantial improvement” requirement within 30 months of the purchase date. As a result, real estate Qualified Opportunity Funds are expected to target development and rehabilitation projects. For example, a Qualified Opportunity Fund could invest in a ground-up development of a mixed-use project that includes new retail and workforce housing.
Collier County & South Lee County Map of Opportunity Zones in Southwest FL. Please ask for information on ANY Zone / Area / City / County / State across the US. We will provide you with detailed information without obligation; just let us know.
Do I need to fund my investment with capital gains?
No. Investments into a Qualified Opportunity Fund do not need to be made with capital gains and a Qualified Opportunity Fund can pool eligible capital gains and “other capital.” However, only investments of qualifying capital gains are eligible for the Opportunity Zone tax benefits.
Lee County and Northern Collier County Map of Opportunity Zones in Southwest Florida. Please ask for information on ANY Zone / Area / City / County / State across the US. We will provide you with detailed information without obligation; just let us know.
Do I need to rollover my entire capital gain into the Qualified Opportunity Fund?
No. The regulations also clarify that you can choose to rollover only a portion of the gain. Also, investors may divide a single gain to be invested into multiple Qualified Opportunity Funds.
Charlotte County, Glades County, Hendry County and Northern Lee County Map showing Opportunity Zones in Southwest Florida. Please ask for information on ANY Zone / Area / City / County / State across the US. We will provide you with detailed information without obligation; just let us know.
How do I know if my capital gains are “eligible”?
There are two key things to consider when determining eligibility of gains. First, only gain treated as a capital gain for U.S. federal income tax purposes is eligible. Ordinary income/gains such as depreciation recapture are not eligible.
Second, to defer a gain through a Qualified Opportunity Fund investment, a taxpayer must generally invest in the Qualified Opportunity Fund during the 180-day period beginning on the date of the sale or exchange giving rise to the gain. Where the gain is earned through a partnership or joint venture that does not choose to roll the gain into a Qualified Opportunity Fund, an individual partner’s 180-day clock starts at the end of the tax year of that venture. (However, if you know the date of sale for gain earned in a venture, you can choose the earlier date if you need to invest earlier.)
How do I get my investment certified by the IRS?
Qualified Opportunity Funds will self-certify using Form 8996 as a part of their tax return. Given the self-certification, there is no initial approval process by the IRS. Cadre, as the manager of the Qualified Opportunity Fund, will need to file IRS Form 8996 every year to report compliance with the 90% asset test and other matters required by the IRS. When filing tax returns, investors will elect a deferral using Form 8949. All investors should consult their tax advisers regarding their individual reporting requirements.
How is this reinvestment different to a 1031 exchange?
Unlike a 1031, the Opportunity Zone rules allow you to reinvest any gain, not just gain from the sale of “like-kind” real estate assets. Moreover, Opportunity Zone investment requires no intermediaries. You can hold your gain on your own and still benefit on any part of it you invest in a Qualified Opportunity Fund within 180 days. Please reach out to us for a more comprehensive side-by-side between 1031s and Opportunity Zones.
I am sitting on substantial capital gains and my 180-day clock expires soon. Can I place this gain in a Qualified Opportunity Fund even if the Qualified Opportunity Fund is not ready to invest all the gains immediately? If I invested all my gain with Cadre today, how long would Cadre have to invest it?
The Proposed Regulations allow you to invest in a Qualified Opportunity Fund immediately. For that Qualified Opportunity Fund to qualify prior to undertaking a development/investment, the manager must produce a written schedule that describes the planned expenditure of the cash (and other working capital).
This schedule must be produced prior to the end of the first 6 month period of the Qualified Opportunity Fund (and in all events by December 31 of the Qualified Opportunity Fund’s first year) and must generally contemplate the expenditure of the Qualified Opportunity Fund assets within a 31-month period, thereby providing the flexibility to extend the window between gain recognition and capital deployment to as much as three years.
Advisers have told us that a best practice is to have your written plan correspond to an identified asset for purchase. Our structure follows that advice and we avoid the potential risks associated with basing your Qualified Opportunity Fund on a written plan that requires the future identification of assets, even within a pipeline. Please reach out to us to discuss specifics related to your situation in order to arrive at an optimal funding strategy.
Do I still have to pay state tax?
One practitioner has stated that “Investors in states that do conform with the federal opportunity zones provisions may receive state tax incentives similar to those available at the federal level. Conversely, investors residing in nonconforming states may be unable to defer and reduce state taxation on the initial gains invested in Opportunity Zones. Investors in these non-conforming states may also be required to recognize gain for state tax purposes on their eventual sale of the opportunity fund investment.”
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