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Opportunity Zones IRS Tax Shelter

Old 01-11-2019, 07:07 AM
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Default Opportunity Zones IRS Tax Shelter

I presently own a office/apts property that I will be selling this year. I learned that the property is located in a Opportunity Zone. Has anyone been involved with a transaction that is part of this? The tax shelter benefit looks outstanding. I have been involved in dozens of 1031 exchanges however I have not seen or been involved with this.

https://www.irs.gov/newsroom/opportu...sked-questions

Last edited by seawalker57; 01-11-2019 at 10:39 AM. Reason: Title info
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Old 01-11-2019, 10:40 AM
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I became aware of this recently and also looking to find more info on long term investment.
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Old 01-11-2019, 11:02 AM
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This appears to be a great shelter of stock gains to real estate for 10 years with a 15% back side. Don't see how this will stay around long.
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Old 01-11-2019, 11:15 AM
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Originally Posted by seawalker57 View Post
I presently own a office/apts property that I will be selling this year. I learned that the property is located in a Opportunity Zone. Has anyone been involved with a transaction that is part of this? The tax shelter benefit looks outstanding. I have been involved in dozens of 1031 exchanges however I have not seen or been involved with this.

https://www.irs.gov/newsroom/opportu...sked-questions
Been looking into this for a few clients recently and let me say that there are a lot of questions to be answered and the proposed regs didn't help all that much. Don't think there is much you can do since you already own the property unless you put the gains into a Qualified Opportunity Fund and purchased QOZ property with that.
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Old 01-11-2019, 11:22 AM
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Originally Posted by seawalker57 View Post
This appears to be a great shelter of stock gains to real estate for 10 years with a 15% back side. Don't see how this will stay around long.
The stock gains will be deferred until the earlier of:

1) 12/31/2026
2) Sell QOF investment

If QOF is held 5 years, you don't recognize 10% of the gain and if held another 2 you don't recognize 5% more. If the QOF is held for 10 years you get s step up in basis to FMV of the investment on date of sale.

No matter what, you are recognizing the initial gain (or 90 or 85%) on 12/31/2026 at the latest. The back end on the appreciation of the QOF after 10 years is the best thing.

(This is very basic and from memory so some numbers might not be 100%.)
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Old 01-11-2019, 11:25 AM
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I know a bit about them from the investor/purchaser side but don't recall seeing any benefit to the seller, unless the seller invested under the new law and is taking advantage of the tax deferral and FV basis increase. In other words, as a current seller of a property located in an opportunity zone I do not believe there is a tax benefit.

Interesting is that many of the opportunity zones are not run down shitholes. Not entirely sure how they came up with the designations.

As an investor there are specific rules to take advantage of the benefit and unfortunately it does not appear that they can be straddled with a 1031 transaction to defer gain not otherwise deferred in the 1031 transaction, like selling a building with a FV of 10 million and 2 million gain and buying a 9 million FV replacement property.
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Old 01-11-2019, 11:27 AM
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Originally Posted by Trollin4Tuna View Post
Been looking into this for a few clients recently and let me say that there are a lot of questions to be answered and the proposed regs didn't help all that much. Don't think there is much you can do since you already own the property unless you put the gains into a Qualified Opportunity Fund and purchased QOZ property with that.
74 fkg pages of proposed regs for something that is conceptually simple.
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Old 01-11-2019, 11:30 AM
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Here is a white paper on it by RSM. I'm sure there are more out there

wp-nt-tax-re-1118-real-estate-qoz-white-paper.pdf
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Old 01-11-2019, 11:38 AM
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For the seller it will increase the marketability and price of your property. For the buyers , they get the tax deferral or exemption. They also have to invest $1 more than purchase price in improvements to qualify.
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Old 01-11-2019, 11:42 AM
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Interesting. I have property in QOZ and didn't know it. Won't be of any use to me, but surprised that area is in a QOZ.
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Old 01-11-2019, 12:08 PM
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Originally Posted by BACKTOTHESEA View Post
I know a bit about them from the investor/purchaser side but don't recall seeing any benefit to the seller, unless the seller invested under the new law and is taking advantage of the tax deferral and FV basis increase. In other words, as a current seller of a property located in an opportunity zone I do not believe there is a tax benefit.

Interesting is that many of the opportunity zones are not run down shitholes. Not entirely sure how they came up with the designations.

As an investor there are specific rules to take advantage of the benefit and unfortunately it does not appear that they can be straddled with a 1031 transaction to defer gain not otherwise deferred in the 1031 transaction, like selling a building with a FV of 10 million and 2 million gain and buying a 9 million FV replacement property.
This zone which is 4 square miles is in the states most expensive commercial property. Just down the street is a CVS at a 5.15 cap offered at 7.15 mill.
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Old 01-11-2019, 12:13 PM
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Originally Posted by Trollin4Tuna View Post
The stock gains will be deferred until the earlier of:

1) 12/31/2026
2) Sell QOF investment

If QOF is held 5 years, you don't recognize 10% of the gain and if held another 2 you don't recognize 5% more. If the QOF is held for 10 years you get s step up in basis to FMV of the investment on date of sale.

No matter what, you are recognizing the initial gain (or 90 or 85%) on 12/31/2026 at the latest. The back end on the appreciation of the QOF after 10 years is the best thing.

(This is very basic and from memory so some numbers might not be 100%.)
Thanks for this info. I was thinking it would be a great time to sell some stock that I feel peaked and to roll over to real estate.
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Old 01-11-2019, 12:18 PM
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I have.
Your property could be more valuable if you could find someone who wants to use it in a QOF (i.e., they may pay more than someone not using it in a QOF). This assumes it's not already built up at its highest and best use, since one of the requirements is that they basically double the basis in the building (not the land).
It's tough to stay involved in the deal unless you're going to own less than 20% of capital and profits, and even then you'd need to sell it and recognize all the gain (versus rolling over, which isn't allowed). There's some uncertainty right now re whether you can treat the land and building differently (maybe roll the land and sell the building) since the IRS said the "substantial improvement" requirement doesn't apply to the land and thus perhaps you can exclude the land from the computations altogether. (Issue is discussed in a bar report that came out yesterday.)
Bottom line is you'd need to find someone who wants to use it in a QOF and be willing to pay a premium as a result. There are all sorts of other issues, but it's better than if it were not in an opportunity zone.
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Old 01-11-2019, 12:23 PM
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Originally Posted by BACKTOTHESEA View Post
Here is a white paper on it by RSM. I'm sure there are more out there

Attachment 1094041
That answers some questions but raises a bunch more.
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Old 01-11-2019, 12:57 PM
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Originally Posted by LuvBigBoats View Post
I have.
Your property could be more valuable if you could find someone who wants to use it in a QOF (i.e., they may pay more than someone not using it in a QOF). This assumes it's not already built up at its highest and best use, since one of the requirements is that they basically double the basis in the building (not the land).
It's tough to stay involved in the deal unless you're going to own less than 20% of capital and profits, and even then you'd need to sell it and recognize all the gain (versus rolling over, which isn't allowed). There's some uncertainty right now re whether you can treat the land and building differently (maybe roll the land and sell the building) since the IRS said the "substantial improvement" requirement doesn't apply to the land and thus perhaps you can exclude the land from the computations altogether. (Issue is discussed in a bar report that came out yesterday.)
Bottom line is you'd need to find someone who wants to use it in a QOF and be willing to pay a premium as a result. There are all sorts of other issues, but it's better than if it were not in an opportunity zone.
Thanks for the info. So it would not require the arms length transaction rule.
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Old 01-11-2019, 01:13 PM
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Originally Posted by seawalker57 View Post
Thanks for the info. So it would not require the arms length transaction rule.
Not sure what rule you're referring to.

By the way, I didn't mean to suggest you couldn't sell to someone who wants to use it in a QOF and you do a 1031 on your side, buying a different property. I think that's still possible (haven't looked at it in detail but don't see why that wouldn't work).

You can't do a tax-free rollover of the property into the QOF itself since the QOF can't have a carryover basis.
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Old 01-11-2019, 01:51 PM
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Originally Posted by LuvBigBoats View Post
Not sure what rule you're referring to.

By the way, I didn't mean to suggest you couldn't sell to someone who wants to use it in a QOF and you do a 1031 on your side, buying a different property. I think that's still possible (haven't looked at it in detail but don't see why that wouldn't work).

You can't do a tax-free rollover of the property into the QOF itself since the QOF can't have a carryover basis.
I understand the two sides and I would be a player in a second property which also happens to be in the zone which that seller is interested in my property. I would be using stock sales to purchase his property as would he with mine. That was the reason for the arms length statement.
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Old 01-11-2019, 03:05 PM
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Sub'd. I know nothing about this -- I'm about to do a 1031 and am interested. Sub'd
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Old 01-11-2019, 03:16 PM
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Just found out that one of our properties is in an opportunity zone. We'll see what happens.
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Old 01-11-2019, 05:36 PM
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Originally Posted by seawalker57 View Post
Thanks for this info. I was thinking it would be a great time to sell some stock that I feel peaked and to roll over to real estate.
that's the Point, I think.

Our opportunity zones are not true opportunities, at least to me. Minimum 8 figure buy in To make something worthwhile. Or super low dollar boondocks stuff. I like the premise and was forced into a six figure long term cap gain this year which would work well for it, but supply isn't there to make it worthwhile.
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