Opportunity Zones: Rules finally come out, and yup, they’re complex (but manageable)

The U.S. Treasury recently proposed some rules surrounding the juicy tax deferral opportunity known as Opportunity Zones, and, yes, they’re complex.

This new section would create three major tax benefits for investments: Gains recognized by a taxpayer and invested into a Qualified Opportunity Fund may be deferred until 2026; 10 percent of the deferred gain may be forgiven if the OZ-Fund investment is held for five years, with an additional 5 percent forgiven if held for seven years; and any post-investment appreciation in the OZ fund may be tax free if held for at least 10 years.

First things first — if you’re an investor who has a large capital gain, then opportunity zones may be for you. But you need to invest via a fund of some sort — either through a multimember LLC or a partnership, according to lawyers and tax accountants.

“You have to have a capital gain to roll into a project,” said Steven Rossman with Drucker & Scaccetti tax accounting firm in Center City.

The OZ fund can invest in real estate, an operating business, or new projects — anything acquired after Jan 1, 2018.

“This can’t be something that was sitting in your inventory before that,” says Chris Catarino, also at Drucker & Scaccetti.

To form your entity, you’ll need to have at least two owners, they add. The entity will file its own tax return with the IRS.

“When that fund files its first tax return, it files a specific form — Form 8996 — which at the top asks a few questions," such as, are you an Opportunity Fund? You check “yes.”

Let’s say you sell Apple stock for $100,000, and your capital gain was $40,000. You can invest that entire gain into an opportunity zone fund and pay no taxes now on the $40,000. After five or even 10 years, a portion of that gain is forgiven. (We refer specifics to the timeline in our chart.)

Time is of the essence: The rules say investors have six months to invest after realizing their capital gain, and another six months to deploy capital. You can invest only in equity — loans from investors are not eligible for the tax incentive.

What sorts of projects might be targets for Opportunity Zone funds?

Real estate is the most likely, said Brad Molotsky, partner with Duane Morris law firm, in particular grocery-anchored retail, warehouses and other industrial real estate, skilled nursing and medical offices, and affordable housing.

With real estate projects, however, the government said investors have about 30 months to complete the project.

Real estate investments must include substantial rehabilitation — doubling the initial amount of money you invest within 30 months. And so-called “sin businesses” aren’t eligible: golf courses and country clubs; massage parlors and suntan facilities; racetrack or other gambling outfits, or liquor stores.

Finally, you’ll have to file the right tax form every year; taxpayers will use Form 8996, Qualified Opportunity Fund, both for initial self-certification and for annual reporting attached to federal income tax returns for the relevant tax years.

A public hearing that was set for Thursday will be rescheduled for at least two weeks after Treasury Department funding is restored, Molotsky said.

Philadelphia through the PIDC, a public-private economic development company, has launched its own Opportunity Zone website (https://www.philadelphiadelivers.com/opportunity-zones) to promote the program locally. Such sites as the Arsenal in Frankford, the Pennovation Center in Grays Ferry, the Chester waterfront, and Camden are all examples of regional possibilities, Molotsky said.

For zones nationally, visit this website to search by zip code: https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx.

The Accelerator for America and the Nowak Metro Finance Lab at Drexel University last year released a policy brief titled “Opportunity Zone Investment Prospectus Guide.” The paper, coauthored by Ken Gross and Bruce Katz, can be found online at https://drexel.edu/lindyinstitute/initiatives/nowak-metro-finance-lab/investment-prospectus-guide.

PolicyMap, a Philadelphia-based data and mapping tool, was set up to show investors where they’ll have the highest impact: areas of high unemployment, low income, and high poverty. PolicyMap worked with Gross on developing a Social Needs Index to focus their investments on these areas. Here’s a link to PolicyMap’s Opportunity Zones: https://plcy.mp/qQBqSGC

And here’s a link to the Social Needs Index: https://www.policymap.com/2018/06/social-needs-index/. And before he passed, local activist Jeremy Nowak led a webinar on how to best utilize Opportunity Zones: https://www.policymap.com/2018/04/mapchats-webinar-guiding-principles-for-opportunity-zones/.

For tax forms: DRAFT of Form 8996 — Qualified Opportunity Fund and an Interactive U.S. Map of Designated Qualified Opportunity Zones.

Locally, there are already funds available to invest in, including the Virtua Opportunity Zone Fund.

PNC Bank has also set up an opportunity zone fund for investors, Catarino said.