New 2019 proposed opportunity funds regulations hand over a set of keys, although some not as bright as others, that open gateways to the Land of OZ. Eager investors waiting for the Yellow-Be-Cautious-Road to be cleared of debris, cracks and potholes are ready to move forward and aren’t too worried about the WATCH FOR FALLING ROCKS sign.
The Land of OZ and QO Funds
Let’s go back to OZ 101 and define a couple of things:
- A Qualified Opportunity Zone (QOZ or OZ) is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.
- A Qualified Opportunity Fund (QOF or OZF or OZ Fund) is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in a Qualified Opportunity Zone.
- OZ Funds now operate under the just-released 169 page proposed regulations. These are the second set to be released after investors had already been allowed to invest in and participate in OZ activities pursuant to mixed-message rules which were (finally) released in October 2018. That first go-ahead came with the handy caveat that if investors had proceeded according to rules prior to proposed regulation publication and finalization, they could continue to operate under those rules if they had documented adherence.
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2019 proposed Opportunity funds regulations
The Treasury Department released these proposed regulations on April 17, which are scheduled for public hearing July 9, 2019. They are intended to answer key questions that have held back some cautious potential investors from stepping up to get their piece of the action.
These proposed regulations come as the Treasury and IRS continue to consider comments received for review on February 14, 2019, and those received after October 29, 2018, when the first set of proposed regulations was published. No surprise that many potential investors had been dragging their feet.
The opportunities in OZ, however, are exceedingly lucrative. Investors have been active, although tentative, for months before the first proposed regulations were published in October of 2018. Other investors have been strategically positioning themselves for years, knowing that the Economic Innovation Group, credited with conceiving the idea behind OZ, was working on something big.
Shortly before these proposed regulations were released, EIC predicted that “these latest regs will rapidly unlock capital that’s been in a holding pattern” and that “2019 is the build-it year for the marketplace.”
WATCH FOR FALLING ROCKS
You may get the keys to enter the Land of OZ, and things may be looking better for you now, but I don’t call it the Yellow-Be-Cautious-Road without a reason. OZ isn’t a DIY project, and without the right team of professionals by your side, you are very likely to get hit by falling rocks. The regulations are strict and tight, which is especially dangerous considering they more or less existed only piecemeal until mid-2018, and under certain conditions various early rules could be grandfathered for individual fund owners. Don’t go down this road alone.
These 5 keys help get you into OZ
Five issues requiring clarity and guidance, among other things, were addressed in the proposed regulations. Submitted comments will be discussed at the public hearing scheduled for July 9, 2019
- A trade or business must derive at least 50% of its total gross income from the active conduct of a trade or business in an OZ to qualify as an OZ business. The proposed regs provide three alternative safe harbors plus a test to determine whether an OZ business meets the 50% gross income test. Until this proposed regulation, requirements to meet the gross income test were unclear.
- OZ Funds can sell assets directly after the 10-year hold with investors still getting the benefit (tax-free to investors who’ve held fund interest for 10 years or more) and can sell assets on a piece-by-piece basis with each successive sale also being tax-free to the investors. However, gains generated by the OZ Fund in the first 10 years are taxable to the investors.
- Two provisions are included which provide more time to the fund to make investments. The working capital safe harbor is tolled for delays caused by needed government approval and cash contributed to a fund within the last six months isn’t subject to the 90% test.
- Abandoned property, partially constructed buildings and other tangible property and leased property within the Opportunity Zone received clarification as to the meaning of “original use.” This confirmed that operating businesses, such as leasing office space in an Opportunity Zone, don’t require substantial improvement to the leased property. This means if a business rents office space, it won’t need to improve that leased office.
- Also addressed are inclusion events, which are transactions which subject the taxpayer to tax liability on the deferred capital gain. These include gifts of OZ fund interests and certain corporate reorganizations and distributions of cash. There is more detail, and the list of inclusions is long.
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There are still unanswered questions, and by July 9 when everybody involved has had the opportunity to sift through the 169 pages and attempt to test them against the practical application, there could be many more questions. But, the clarity provided by these latest proposed regulations is going to stir up a lot of dust along the Yellow-Still-Be-Cautious road twisting through the Land of OZ.
We know about Qualified Opportunity Funds and OZ and have been working with clients involved in projects and funds for over two years. If you’re already involved or thinking about getting in, you have questions. We have answers.
I agree with John Lettieri, president of the Economic Innovation Group when he said that these clarifications are “a positive step that removes most of the obvious impediments that have kept capital on the sidelines,” and that “2019 is the build-it year for the marketplace.”
WATCH FOR FALLING ROCKS
The bottom line
New tax laws aren’t for the faint of heart, DIYers, or “flying-by-the-seat-of-your-pants” kind of person. Don’t go it alone.
Whether you’re a business owner or not, every person should have a proactive, planned tax strategy. Don’t just wait for a tax person to tell you what probably happened last year and then tell you how much you owe.
You can have the same opportunities as my clients have to control your own financial future. I can become your CPA tax specialist and financial business and life goals adviser and you can have the control you need and want.
Our goal is to become part of your overall life and business goal planning team so that you’ll be able to establish your own goals and know that you have a trusted professional on your team. We establish and maintain a personal and business relationship with our clients. Your LIFE is your business and your BUSINESS is your life. We’re here for YOU.
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