Soon, individual and corporate taxpayers in Florida and elsewhere in the United States may have the choice of investing their 2018-2025 capital gains in “Qualified Opportunity Funds” rather than paying income taxes currently on such gains. Qualified Opportunity Funds are funds that will focus on investing in designated economically disadvantaged census tracts, called “opportunity zones,” located in Florida and other U.S. states and territories.
Gains from 2018 invested in Qualified Opportunity Funds within 180 days of the sale will not be subject to federal capital gains taxes for 2018. Rather, 2018 capital gains invested in Qualified Opportunity Funds in 2018 will generally have to be included in income only in 2026, and apparently only at most in a 15-percent reduced amount. For capital gains recognized and invested in Qualified Opportunity Funds between 2019 and 2025, the deferral benefit and tax reduction on the original gain, still recognized in 2026, is reduced somewhat or eliminated. Although the gains rolled over between 2018 through 2025 are predominantly or entirely included in 2026, any post-investment appreciation in a Qualified Opportunity Fund investment after 10 years, when such investment is sold or liquidated, will be exempt from federal income tax. A goal of the opportunity zone program is to attract gains, including, but not limited to, the trillions of dollars in as yet unrecognized 2018 appreciation in stock of publicly traded corporations, for use in opportunity zones.
On April 19, Gov. Rick Scott nominated to the U.S. Treasury Florida census tracts proposed for designation as opportunity zones. A list and map of these nominated Florida census tracts can be found at: http://www.floridajobs.org/business-growth-and-partnerships/for-businesses-and-entrepreneurs/business-resource/opportunity-zones. The nominated census tracts constitute about 10 percent of all the census tracts in Florida. The U.S. Treasury Department has up to 60 days to certify Gov. Scott’s nominations. The other U.S. states likewise have submitted their selected census tracts for certification to the U.S. Treasury, and many census tracts throughout the U.S. have already been designated as opportunity zones.
Once certified as an opportunity zone, a census tract becomes an eligible focus for investment by Qualified Opportunity Funds. A Qualified Opportunity Fund is a partnership or corporation which is certified by the U.S. Treasury Department and which invests 90 percent of its assets in “Qualified Opportunity Zone Property.” Qualified Opportunity Zone Property is a cash investment in originally issued stock of a corporate “Qualified Opportunity Zone Business,” a cash investment in originally issued partnership interests of a partnership Qualified Opportunity Zone Business, or the assets of a directly owned and operated Qualified Opportunity Zone Business.
A Qualified Opportunity Zone Business is generally defined as a business, substantially all of whose owned or leased real estate and equipment is “Qualified Opportunity Zone Business Property.” Qualified Opportunity Zone Business Property is property acquired by purchase, the original use of which in the Qualified Opportunity Zone begins with the Qualified Opportunity Zone Business (except that certain substantially renovated buildings can qualify), and whose only substantial use is in a Qualified Opportunity Zone.
There are some technical issues which forthcoming Treasury Regulations and perhaps technical corrections legislation will need to address, such as the requirements for certification as a Qualified Opportunity Fund, the types of property whose gain is eligible for rollover, whether pre-2026 Qualified Opportunity Fund distributions can terminate the rolled-over gain deferral, and what anti-abuse rules can apply.
The opportunity zone program differs significantly from the existing New Markets Tax Credit program, which is widely used in Florida and elsewhere in the United States. The New Markets Tax Credit program involves a competition run by the Treasury Department among intermediary funds, called “Community Development Entities,” for a fixed amount of federal income tax credits the funds can then provide to their investors. By contrast, the opportunity zone program has no application process for, nor fixed dollar limit on, the capital gain deferral and post-investment capital gains tax exemption benefits that the IRS allows Qualified Opportunity Funds to provide their investors. Thus, only the private market will determine how large the Qualified Opportunity Fund program will become.
On the other hand, Qualified Opportunity Zones are also typically served by Community Development Entities. This creates possible synergies between the New Markets Tax Credit program and the Opportunity Zone program. For example, a Qualified Opportunity Zone Business might borrow low-interest-rate loans from a Community Development Entity.
For long-term investors, Qualified Opportunity Funds may be an attractive investment. For Florida law firms, the opportunity zone program may provide significant business opportunities for their securities, corporate, real estate, tax, and other departments.
Alan Lederman is a tax shareholder with Gunster in Fort Lauderdale.