New Opportunities To Invest In Covington Understanding Qualified

New Opportunities To Invest In Covington Understanding Qualified

New Opportunities To Invest In Covington Understanding Qualified Opportunity Zones Colleen R. Fausz Patrick Hughes What is a Qualified Opportunity Zone? Provides significant tax incentives for taxpayers to reinvest unrecognized capital gains in certain property and businesses located or operating in QOZs.

Enacted as part of the Tax Cuts and Jobs Act of 2017. Encourages economic development in low-income areas by providing various tax incentives for private investments in QOZs. What is a Qualified Opportunity Zone? Treasury has designated QOZs in all 50 states, the District of Columbia, and five U.S. possessions - Map is FINAL KY - 144 low-income census tracts in 84 counties 7 designated in Kenton (5), Campbell (1), and Boone (1) counties.

Hamilton Co., OH 30 QOZs, including Queensgate and Camp Washington. Qualified Opportunity Zones in Kentucky Source: http:/ /www.thinkkentucky.com/OZ/ Qualified Opportunity Zones in Kentucky Source: https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xml

Qualified Opportunity Zones in N. Kentucky Source: https://www.cims.cdfifund.gov/pre paration/?config=config_ n mtc.xm1 QOZ Tax Incentives 1. Temporary deferral of capital gain. 2. Step-up in basis. 3. Permanent exclusion of gain on appreciation. Temporary Deferral Incentive

Taxpayer can elect to temporarily defer capital gain from the sale or transfer to an unrelated party of any property that the taxpayer owns as long as the taxpayer reinvests the gains in a Qualified Opportunity Fund. GAINS DEFERRED - Proposed regulations make it clear that deferral is only available for gain that is treated as capital gain for federal tax purposes. ANY PROPERTY - There does not appear to be any restrictions on the types of property that can be sold to generate the gain - not limited to real property or business property. Taxpayer must reinvest the deferred amount within the 180-day period beginning on

the date of the sale or transfer of the property generating the gain - proposed regulations address deferral of gain from partnership. Basis Step-Up Incentive Provides a tiered "step-up" in the taxpayer's basis in the gain it reinvests in the QO Fund depending on how long the taxpayer holds the investment. Absent this statutory "step-up," the taxpayer's initial basis in the reinvested

gain is zero. "Step-Up" Holding Period. If the taxpayer holds the investment for at least five years, the taxpayer's basis in the investment is increased by an amount that is equal to ten percent (10%) of the deferred gain. If the taxpayer holds the investment for seven years, the taxpayer's basis is increased by an additional five percent (5%) of the deferred gain.

Basis Step-Up Incentive Because the temporary gain deferral period ends no later than the tax year including December 31, 2026, the taxpayer will need to reinvest capital gain in a QO Fund and elect deferral treatment by December 31, 2019 to permit the taxpayer to hold the investment for seven years and receive the full benefit of the basis step-up provision. Permanent Exclusion Incentive Taxpayer can permanently exclude capital gain

on the sale or transfer of an investment in a QO Fund that the taxpayer holds for at least ten years. Taxpayer would use IRS Form 8949 to elect permanent gain exclusion. QO Zone Incentives - Example July 31, 2029 July 30, 2026 Before July 30, 2019

Jan 31, 2019 July 30, 2024 QO Zone Incentives - Example * Assume OZ Investment is sold for $3 million at the end of each holding period. Absent QO Zone, this would likely be the tax result to Taxpayer for the same course of action - initial sale of asset, reinvestment in new project, and eventual sale - $1 million of gain recognized at time of asset sale and $2 million of gain recognized when new project is sold.

Qualified Opportunity Fund An investment vehicle organized as either a partnership (including an LLC treated as a partnership for tax purposes) or corporation that was formed for the purpose of investing in a qualified opportunity zone property. At least 90% of the Fund's assets must consist of QOZ Property.

A taxpayer can self-certify to become a QO Fund -Taxpayers are not required to seek pre-approval or related action to establish a QO Fund. To self-certify, the taxpayer will complete a form and attach it to a timely filed federal income tax return for the relevant taxable year. IRS Form 8996 is used for self-certification - form is also used for annual 90% compliance. Investment Types in Opportunity Zones

Qualified Opportunity Property 3 categories permitted Qualified opportunity zone stock {"QOZ Stock"}; Qualified opportunity zone partnership interest {"QOZ Interest"); or Qualified opportunity zone business property{"QOZ Business Property"). QOZ Partnership Interest + Stock

Any capital or profits interest in a domestic partnership (including an LLC treated as a partnership for federal tax purposes) if: a. the QO Fund acquired the interest after December 31, 2017 in exchange for cash; b. at the time the QO Fund acquired the interest, the entity was a QOZ Business or was organized to be a QOZ Business; and c. during substantially all of the time the QO Fund held the interest, the entity qualified as a QOZ Business.

At this time, there is no guidance as to what period of time an entity must qualify as a QOZ Business to satisfy the "substantially all" requirement for a QOZ Interest. QOZ Business Property Tangible property that a QO Fund or QOZ Business purchased after December 31, 2017 and that is used by the QO Fund/QOZ Business in a trade or business operating in a QO Zone for substantially all of the time that the QO Fund/QOZ Business owns the property.

The original use of the property in the QO Zone must begin with the QO Fund or QOZ Business, or the QO Fund/QOZ Business must substantially improve the property. "Original use" - not defined in the statute. Regulations/caselaw address use of the term in other statutory contexts - "First use to which the property is put, whether or not such use corresponds to the use of such property by the taxpayer." QOZ Business Property

Property treated as "substantially improved" if the basis of the QO Fund or QOZ Business in the property increases over a 30-month period beginning at acquisition by an amount that exceeds its initial basis (i.e., the purchase price) in the property.

Improvement expenditures of the QO Fund or QOZ Business in the property over the 30month period must exceed the original acquisition price. Permits parties to purchase and develop property without having to meet the 'original use" requirement. Does not permit parties to purchase developed property with little or no additional improvement. Regulations provide substantial improvement measured by addition to adjusted basis of the building, not the underlying land. At this time, there is no guidance as to what period of time a partnership must qualify as a QOZ Business to satisfy the "substantially all" requirement for a QOZ Business Property. QOZ Business Requirements

1. The activity must be a trade or business in which substantially all of the tangible property owned or leased by the taxpayer is QOZ Business Property. Proposed regulations define 'substantially all' in this context to mean at least 70%. 2. At least 50% of the total gross income of the taxpayer must be from the active conduct of such trade or business WITHIN THE ZONE, and the taxpayer must use a substantial portion of its intangible property in the active conduct of such trade or business. 3. Less than 5% of the average aggregate unadjusted bases of the property of the entity may be attributable to nonqualified financial property (e.g., debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, or

annuities). 4. "Sin Business" Restriction. The trade or business activity must not constitute a private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises. Basic Model for Real Estate Development Project Real Estate Development New construction Substantial improvement

Questions? Colleen R. Fausz 859-426-2169 [email protected] Patrick Hughes 859-426-2151 [email protected]

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