Opportunity Investors and Their Fund Managers Need To Do This

Opportunity Zones provides a way to mitigate your capital gains taxes significantly while uplifting needy communities. A no brainier.

Are You An Investor? This Is What You Should Be Doing Before The Year-end.

What Can I Do To Lower My Capital Gains Taxes?

You can mitigate gains that derive from the sale of real estate, stock or bond portfolios, even artwork and collectibles, and all other tangible and intangible assets with the Qualified Opportunity Zone (QOZ) program.

Explain The QOZ Program

The QOZ program is part of the 2017 Tax Cuts and Jobs Act. These programs can help you defer gains from the sale of the assets mentioned above, even including Bitcoin and other cryptocurrency sales. The QOZ program is by no means restricted to real estate only. Taxpayers can earn a ten percent tax basis increase in their Qualified Opportunity Fund investment by the fifth year and another five percent increase in year seven.

More importantly, gains that accrue after the QOF investment are 100 percent tax-free if you do not sell the stake in the first ten years. In the process, you gain these tax benefits in exchange for aiding disadvantaged communities.

Am I Still In Time?

Do not procrastinate. Your deferred tax gains must be reinvested into a QOF within 180 days after recognizing the tax gain on the sale.

Deadlines

1. June the 28th, 2019, marked a deadline for reinvesting flow-through capital gains reportable on December 31st, 2018, into a QOF.
2. The deadline for reinvesting non-1231 and K1 capital gains generated by a taxpayer from capital assets held directly started on the earlier closing dates of these sales.
3. According to the regulations, investors cannot reinvest their net 1231 and flow-through capital gains into a QOF before December 31st,
4. If you want to obtain the maximum 15% tax-free step-up in your QOF investment, December 31st, 2019, is also the deadline for that.
5. If you miss the December 31st, 2019 deadline, you will be limited to a ten percent step-up.

How Important Is It To Adhere To The 180-Day Deadline?

There is some confusion over this. The QOZ program is very forgiving. If you merely fund a QOF within the required 180-days, it seems to be sufficient to start the 2026 tax deferral process. The actual deployment of the funds into a business property (stock; partnership or qualified assets) can spread over a period of more than 37 months.

If You Established A QOF Already, This Is Next

1. Testing Criteria

   1. Your QOF must, on average, hold 90 percent of its assets in a QOZBP (QOF business property). Your holdings will be tested twice per year, and if you do not comply, you will be penalized.
   2. The penalty, linked to the floating federal underpayment rate, is approximately six percent per annum.
   3. QOFs are not eligible for the 31-month working capital safe harbor.
   4. Every QOF must establish a QOZB to make long-term deployment of its funds possible.
   5. QOZBs (Qualified Opportunity Zone Businesses) are eligible for the working capital safe harbor.
   6. The only requirement for QOZBs are to hold an average of 70 percent or more of their assets in QOZBPs.
   7. The penalties for a QOZB that fails its Qualified Asset Test is severe. It can invalidate both the QOZB and the QOF, resulting in forfeiture of all the OZ benefits.
   8. At the moment, there is no correction period in the regulations.

2. Establish The QOZB Entity

   1. You have to establish a QOZB or multiple QOFs underneath the QOF to:
      1. Be entitled to the lower 70 percent QOZBP threshold
      2. Be entitled to the 31-month working capital safe harbor.
   2. To obtain the benefits, you must structure the QOZB as a corporation or partnership. It cannot be a disregarded entity.
   3. It is vital to establish a QOZB within six months after certifying the parent entity as a QOF.
   4. The date of certification must be before the date the QOF received any funds from a qualified investor.

3. Testing Dates

   1. In year one, the asset test for the QOF must take place at the end of the first six months, including the month of certification and the end of the calendar or fiscal year.
   2. The first test must ignore all funds received during the six months preceding the test.
   3. This means that for the first test date, no penalties can be assessed.
   4. For calendar entities certified before August, the second test date will be December the 31st. Take care to control the asset mix before this test date.
   5. Hereafter the test dates will always fall on June 30 and December 31.
   6. The asset test is done on IRS Form 8996. In year one the entity self-certifies that it established a QOF to participate in the QOZ program. The same goes for the asset test based on monthly average ratios.
   7. If a 90 percent test is missed the penalty is calculated on the asset values multiplied by the difference between the actual QOZBP percentage and the 90 percent target.
   8. The penalty interest rate is the rate for each quarter as determined by the IRS in the first month of the preceding quarter.

4. Investing Your QOF And QOZB Cash

   1. In terms of Tranch II Regulations released in April 2019, the maturity period for fixed income instruments is limited to investments with a maturity of 18 months or less.
   2. Longer maturities get treated as a non-qualified OZ business property (5 percent limit) and can impede your ability to meet the 70 percent test.

5. Develop A Business Plan

   1. Before the QOZB can treat cash held by the QOZBP as working capital, and before it will be eligible to be included in the measurement of the 70 percent test, fund managers are required to develop a significant business plan for the QOZB which provides cash flow projections.
   2. Not all the money flowing in is earmarked for real estate investments. Much money is also allocated for the start, acquisition or development of businesses that operate within OZs.
   3. Already, tens of billions of dollars were invested during the first half of 2019, and even more, are coming. It is essential to ensure compliance with the complicated AOZ rules.