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Qualified Opportunity Zones Revisited: Tax Incentives for Commercial Real Estate and Other Investment

Deferred Capital Gains and Tax Abatement Under IRC Section 1400Z; Forming Qualified Opportunity Funds

Note: CPE credit is not offered on this program

Recording of a 90-minute premium CLE video webinar with Q&A

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Conducted on Monday, September 13, 2021

Recorded event now available

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This CLE course will analyze the current regulatory and tax framework around Qualified Opportunity Zones (QOZs), including capital gains deferral, tax-free treatment of long-term appreciation, and other tax benefits associated with real estate and other investments in QOZs. The panel will discuss eligibility requirements for Qualified Opportunity Funds (QOFs), the process for getting fund approval, and fund formation. The panel will also discuss the potential impact of the Biden administration's tax plan on QOZs.

Description

The 2017 tax reform law created QOZs to encourage private investment in businesses, projects, and commercial property located in designated census tracts. IRC Sections 1400Z-1 and 1400Z-2 allow real estate and other investors to defer current capital gains, significantly increase basis in long-term investments, and qualify for tax abatement by reinvesting capital gain proceeds in QOFs.

QOZs are eligible for tax-advantaged investment for a period of 10 years. In 2018, 2019 and 2020, the IRS issued regs that provide clarity on various issues, including the types of gains eligible for deferral, related party transactions, and the treatment of REIT capital gains. The approval process for QOFs is on a self-certification basis by funds on initial tax return filings.

To leverage the program's tax benefits, a taxpayer must reinvest capital gain proceeds in a QOF within 180 days from the date of the sale or exchange of a capital asset (but any case by December 31, 2026). The QOF must maintain at least 90 percent of assets in QOZ property--directly or through equity or partnership holdings. Counsel must fully understand structuring requirements to qualify for, and preserve, these tax benefits through the life of an investment.

The Biden administration or the current Congress is unlikely to make any substantial changes to the tax benefits of the QOZ program, but they could add a reporting requirement for QOFs to demonstrate how their investments benefit their related QOZs. The Biden tax plan might include raising capital gains tax rates and elimination of Section 1031 exchanges, both of which could drive more investment in QOFs and QOZ's.

Listen as our authoritative panel analyzes requirements for investment in QOZs and how to structure QOFs to obtain the capital gain deferral and step-up in basis provided under the new tax law. The panel will also discuss the twinning of fund investments with new markets and other existing tax credits.

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Outline

  1. Qualified Opportunity Zones
    1. Legislative history: 2017 tax act and subsequent regulations
    2. Designation by QOZs by the states
    3. Types of investment: commercial real estate and operating businesses
  2. Qualified Opportunity Funds: eligibility requirements, formation, self-certification
    1. Tax incentives to invest in Qualified Opportunity Funds/Zones
    2. Deferral of short- and long-term capital gains
    3. Step up in tax basis
    4. Tax abatement of all post-investment appreciation
  3. Pairing Qualified Opportunity Zone investments with new markets tax credits, low-income housing tax credits, renewable energy investment and production tax credits, and other tax incentive programs
  4. Advanced structuring considerations
  5. Possible changes under the Biden administration

Benefits

The panel will review these and other critical issues:

  • What are the tax deferral and tax abatement features of QOZ investment?
  • How are QOFs approved, and what is the preferred entity structure?
  • When must the reinvestment of capital gains be made, and how long must it be held to qualify for the tax benefits?
  • What significant questions are subject to further Treasury guidance or proposed regulations?
  • How might QOZ investments be used in real estate development and finance, and can they be twinned with other tax incentives?
  • How might reporting obligations of QOFs change under the Biden administration?

Faculty

Molotsky, Brad
Brad A. Molotsky
Partner
Duane Morris

Mr. Molotsky’s primary practice is focused in the areas of commercial leasing, acquisitions and divestitures,...  |  Read More

Scalio, Joseph
Joseph J. Scalio
Tax Partner
KPMG

Mr. Scalio is KPMG’s Pennsylvania Business Unit Tax Leader in the Passthrough and Asset Management Practices,...  |  Read More

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