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Qualified Opportunity Funds Summary – October 2018

10.26.2018

New Internal Revenue Code Section 1400Z creates qualified opportunity funds and qualified opportunity zones. This program is designed to incentivize the reallocation of capital to designated low-income census tracts. It presents a potentially remarkable opportunity for taxpayers to defer and reduce capital gain and subsequently exclude the appreciation of a qualified opportunity fund investment from income.

Potential Benefits

  • A realized capital gain that is timely reinvested in a qualified opportunity fund is deferred until the earlier of (i) the date that the qualified opportunity fund investment is sold or (ii) December 31, 2026
  • The amount of the deferred capital gain ultimately recognized is reduced by up to 10% if the qualified opportunity fund interest is held for 5 years and by up to an additional 5% to a total of 15% if the qualified opportunity fund interest is held for 7 years
    • This would, for example, allow a $10 million capital gain realized in 2018 to be taxed as an $8.5 million capital gain on December 31, 2026
  • If held for 10 years, the ability to make a tax-free sale of the qualified opportunity fund interest (the original deferred capital gain would still be taxed, but only 85% of it)

Basic Statutory Requirements

  • Capital gain realized from the sale of property to an unrelated party after December 31, 2017
  • Reinvestment of the deferred capital gain in a qualified opportunity fund within 180 days of the sale or exchange
  • The investment of at least 90% of the qualified opportunity fund’s assets in qualified opportunity zone property

Current Status of the Program

Qualified Opportunity Fund

  • A qualified opportunity fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an opportunity zone and that utilizes the investor’s capital gains from a prior investment for funding the qualified opportunity fund
  • A qualified opportunity fund must:
    • Be organized as a partnership or corporation for Federal income tax purposes;
    • Be organized to invest in qualified opportunity zone property, which is defined by Code Section 1400Z-2(d)(2) to include qualified opportunity zone partnership interests and stock (indirect investment through a portfolio company that owns an opportunity zone business) and qualified opportunity zone business property (direct investment); and
    • Invest at least 90% of its assets, calculated as the average of two semiannual testing dates, in qualified opportunity zone property
  • A qualified opportunity fund can have only one member or multiple members
  • A qualified opportunity fund can be, but does not have to be, professionally managed

General Investment Structures

General Investment Structure

Practice Areas

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