While sounding almost too good to be true, the rationale of allowing for this type of appreciation treatment is to attempt to incentivize additional or initial investment in the designated low-income areas in an effort to boost economic growth and job creation.
As a follow-up to our Alert from March 1, 2018, on April 9, the IRS and U.S. Treasury approved designated Opportunity Zones in 18 states and territories—including Arizona, California, Colorado, Georgia, Idaho, Kentucky, Michigan, Mississippi, Nebraska, New Jersey, Oklahoma, South Carolina, South Dakota, Vermont and Wisconsin, as well as American Samoa, Puerto Rico and the U.S. Virgin Islands.
Designations are approved for 10 years and permit investors to defer tax on any prior gains until no later than December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund. A Qualified Opportunity Fund as an investment vehicle that is organized to make investments in the zones designated above as Qualified Opportunity Zones. Note, that while we still await draft regulations, it appears that if investors hold their investments in the Opportunity Fund for at least 10 years, the investor would be able to increase its basis to that of the fair market value of the investment on the date it is sold—in other words, their appreciation in the value of the asset would be tax free.
While sounding almost too good to be true, the rationale of allowing for this type of appreciation treatment is to attempt to incentivize additional or initial investment in the designated low-income areas in an effort to boost economic growth and job creation.
As you may recall, under the Tax Cuts and Jobs Act passed at year's end, states, the District of Columbia and U.S. possessions were able to nominate low-income areas to be designated as Qualified Opportunity Zones, which would be eligible for the noted tax benefit. States were required to submit their lists by March 21 or request a 30-day extension. U.S. Treasury then had 30 days to review and approve of the submitted lists of zones. On April 9, U.S. Treasury approved the aforementioned state and territory submissions. The final deadline for such nominations is April 21, 2018.
Attorneys in Duane Morris’ Real Estate Practice Group and Corporate Practice Group will continue to monitor and provide updates on any related developments once applicable regulations from the Treasury Department are issued.
For More Information
If you have any questions about this Alert, please contact Brad A. Molotsky, Arthur J. Momjian, any of the attorneys in the Real Estate Practice Group, attorneys in the Corporate Practice Group, attorneys in the Project Development/Infrastructure/P3 Practice Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.