Qualified Opportunity Zone Updates

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In a previous issue of our newsletter we discussed Opportunity Zone investments and the potential tax savings to investors. As of this writing, final guidance has not yet been released, which leaves taxpayers and their advisors to rely on proposed regulations. Listed below are some of the current Qualified Opportunity Zones (QOZ) proposed regulations issued in April 2019:

 

  • It is no longer required that an investment made into a Qualified Opportunity Fund (QOF) be made only with cash. Instead, other property may be used to make the qualifying investment.
  • QOF investments held as partnerships or S-Corporations for 10 or more years will provide the partner / shareholder the ability to elect to exclude all or a portion of capital gain allocated to them from assets sold by the QOF after the 10-year period without having to sell their interest in the fund. For example, if a QOF owned an apartment building in a QOZ and sold it after 10 years, a partner or shareholder in the QOF may elect to exclude the associated gain on sale from their passthrough
    • Note: if the investment in a QOF is not held for at least 10 years, then none of the gain passed through from the sold Qualified Opportunity Zone Business (QOZB) property will be eligible for exclusion.
  • The proposed regulations provide more favorable time constraints for investing funds in QOZ property/businesses.
  • Depreciable property that has been vacant for the past 5 years may qualify as original use property.
  • Although not requiring substantial improvement, land must be used in an active trade or business.
  • Leased property may now also qualify as QOZB property as long as the lease is entered into after December 31, 2017 and its terms are considered to be “at arms-length”. This opens the door for businesses to lease office space in the QOZ and qualify as a QOZ property.
  • A business may qualify as a QOZB under any one of the following safe harbors regardless of the business’ actual location or headquarters:
    • At least 50% of the hours spent by employees and independent contractors are within a QOZ.
    • At least 50% of the amounts paid by a business to employees or independent contractors are for services performed within a QOZ.
    • The property is located within a QOZ and the operational functions performed in the QOZ are necessary to generate at least 50% of the gross income of the business.

 

To reiterate, the changes noted above are proposed and have not been approved in final form. We will continue to monitor developments in this area and provide updates to you as more formal final regulations are released.

 

If you are considering investing into a QOF or QOZB, please reach out to your representative at DKC to ensure that all aspects of the sale and timing of the subsequent investment are considered.

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