Zonability.com

Please log in to continue.
You are not authorized to access this page.
Redirecting...

 Zonability is helping you understand Opportunity Zones from the perspective of a residential agent and/or small commercial broker. This isn't designed to be comprehensive but to help articulate the "high level" points to help explain to the lay person how it works and resources to review to learn more.

Our description is:

Opportunity zones (OZ) are designated based on census tract boundaries areas for investments in primarily economically poor locations. Investors who set up a new entity or form a partnership just for this purpose and play by the rules that include annual filings showing substantial investment in a property or business located in OZ, benefit through a tax reduction or break.

What is and isn't part of OZ:

These investments can come in the way of real property, business or both.

Investors have to set up a company or partnership for this purpose. An individual can't participate without setting up a company or partnership for this purpose.

The entity can own the property, the business or both.

Capital gains from investments are the fuel for OZ investment.

Program for qualifying ends at the end of 2026.

Time lines that matter are 5, 7 and 10 years. A 10-year or more hold changes the basis in the investment to reflect a revised figure rather than historic. This translates into a "no tax due" moment.

If an investment is held less than 10 years, the benefit is not as good.

The need to stay qualified means annaul filings with the IRS.

The investments require a “90% investment standard" and form 8996 is used.

Timeline - 30 months period

Under the qualified opportunity zone business property rules, property is treated as substantially improved only if, during any 30-month period beginning after the date of acquisition of such property, additions to basis with respect to such property in the hands of the qualified opportunity fund exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the qualified opportunity fund.

Resources

IRS - FAQ on OZ

IRS form 8996 instructions

CDFI Program

Sites by Private funds

Source focused on business investment, nice quality layout and definitions. SBM Intelligence

Descriptions/definitions

Substantial improvement - refers to 30-month window

Original use - not yet defined

CDFI - Stands for Community Development Financial Institutions Fund

Qualified Opportunity Fund (QOF) – an eligible corporation (LLC) or partnership needed to take advantage of the tax benefits.

Qualified Opportunity Zone – the locations identified by the State’s government.

Qualified Opportunity Zone Property – this includes stock, partnership interest and business property all of which must meet the requirements for being “qualified.”

Qualified Opportunity Zone Business - this excludes certain businesses specifcially, golf courses, country club, massage parlor, hot tub facility, suntan facility, racetrack or other gambling activity, liquor stores.

Working capital – for the acquisition, construction and/or substantial improvement of tangible property in a qualified opportunity zone.

90% Investment Standard - explained (penalities apply if this is not met)

The 90% investment standard is determined by the average of the percentage of qualified opportunity zone property held in the QOF (the fund) as measured on:

1.The last day of the first 6-month period of the tax year of the QOF, and

2.The last day of the tax year of the QOF.

Assume for example that only 80% of the assets of a given QO Fund (“InvestFund”) constitute qualified opportunity zone property measured on the last day of InvestFund’s taxable year, resulting in InvestFund not meeting the 90% requirement.  InvestFund must pay a penalty for each month that more than 10% of the total assets are not qualified opportunity zone property.  Thus, if InvestFund has assets of $5,000,000, of which 80% are qualified opportunity zone property for the pertinent 6 month period, InvestFund will not meet the 90% requirement.  Assuming the underpayment penalty rate is 2%, InvestFund must pay a penalty of $10,000 [$4,500,000 ($5,000,000 x 90%) – 4,000,000 ($5,000,000 x 80%) x 2%] for each month of the 6 month period).

Qualified opportunity zone business property is tangible property that a QOF acquires after 2017 and uses in a trade or business and that satisfies both of the following tests.1.The use of the property in the qualified opportunity zone originates with the QOF, or the QOF substantially improves the property.2.During substantially all of the QOF's holding period for such property, substantially all of the use of such property was in a qualified opportunity zone.To satisfy the test in (1) above, the QOF substantially improves property if, during any 30-month period beginning after the date of the acquisition of such property, additions to basis with respect to such property in the hands of the QOF are more than an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the QOF.Qualified opportunity zone business is a trade or business if substantially all of its owned or leased tangible property is qualified opportunity zone business property, defined earlier, and if the trade or business satisfies tests (see Form 8896). 

Example: A qualified opportunity fund (QOF) purchases 100 acres of vacant land in an opportunity zone for $5 million and builds a hotel for $10 million. Only 10 acres of the land is integral to the hotel business. QOF made $400,000 of improvements to the remaining 90 acres and used it in a farming business. QOF will likely have $10.5 million of qualified opportunity zone business property and $4.9 million of nonqualified property assuming that land can be substantially improved.