The Opportunity Zones program was established by Congress in the Tax Cut and Jobs Act as
an innovative approach to spurring long-term private sector investments in low-income urban and rural communities nationwide. The program is based on the bipartisan Investing in Opportunity Act
Best Practices for Implementing an External Recruiting Partnership
Opportunity Zone 2018 Tax Guide
1. Opportunity Zone
2018 Tax Guidance
By: Busayo Ogunsanya CPA MST
Managing Partner
www.bigappletaxreturn.com
busayo@bigappletaxreturn.com
CONFIDENTIAL AND PRIVILEGED
2. WHAT IS A OPPORTUNITY ZONE?
The Opportunity Zones program was established by Congress in the Tax Cut and Jobs Act as
an innovative approach to spurring long-term private sector investments in low-income urban and rural
communities nationwide. The program is based on the bipartisan Investing in Opportunity Act.
An Opportunity Zone is an economically-distressed community where new investments, under certain
conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they
have been nominated for that designation by the state and that nomination has been certified by the
Secretary of the U.S. Treasury.
1. Opportunity Zones were added to the tax code by the Tax Cuts and Jobs Act on December 22, 2017.
2. Opportunity Zones are an economic development tool—that is, they are designed to spur economic
development and job creation in distressed communities.
3. Opportunity Zones are designed to spur economic development by providing tax benefits to investors. First,
investors can defer tax on any prior gains until the earlier of the date on which an investment is sold or
exchanged, or December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund. Second,
if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be
eligible for an increase in basis equal to the fair market value of the investment on the date that the
investment is sold or exchanged.
3. SO, WHAT’S THE BIG HYPE?
Investor Incentives:
U. S. investors currently hold $2.3 trillion in unrealized capital gains, representing a significant untapped
resource for economic development. Opportunity Funds will allow these investors throughout the
country to deploy their resources as Opportunity Zone investments.
The program establishes a mechanism that enables investors with capital gains tax liabilities
across the country to receive favorable tax treatment for investing in Opportunity Funds that are
certified by the U.S. Treasury Department.
The Opportunity Funds use the capital invested to make equity investments in businesses and real
estate in Opportunity Zones designated by each state.
Investors who plow a 2018 capital gain into an opportunity fund gets three breaks:
1. Deferral of tax on their 2018 gain until 2016
2. A 15% reduction on those gains when they are taxed in 2026
3. Tax free growth of their opportunity investment, as long as they hold it for at least ten
years.
4. INVESTOR INVESTMENT EXAMPLE:
In 2018, an individual investor sells 1,000 shares of Amazon stock that they purchased in
2013 for $250,000. The sale at $1,250 per share results in a $1 million capital gain. Instead
of paying the $238,000 (assuming 20% rate and 3.8% net invest income tax) in federal
capital gains tax on this sale, the investor rolls their $1 million gain into a Qualified
Opportunity Fund that invests the capital in newly issued preferred stock shares of various
operating businesses located in Opportunity Zones with a plan to liquidate the fund in 2028.
The assumed value of this investment in 2028 is $2 million. The benefits received by this
investor include:
• Investing $1 million instead of the $762,000 that would be remaining if the capital was not
re-invested into an Opportunity Fund.
• Paying $202,300 in taxes in 2026 instead of paying $238,000 in 2018.
• Owing no additional tax on the $1 million in capital gains on the Opportunity Fund
investment realized in 2028
5. CREATION OF OPPORTUNTITY FUNDS
1. Must be certified by the U.S. Treasury Department.
2. Must be organized as a corporation or partnership for the purpose of investing in Qualified
Opportunity Zone Property.
3. Must hold at least 90% of their assets in Qualified Opportunity Zone Property.
4.Qualified Opportunity Zone property includes newly issued stock, partnership interests, or business
property in a Qualified Opportunity Zone business.
5.Opportunity Fund investments are limited to equity investments in businesses, real estate,
and business assets that are located in a Qualified Opportunity Zone. Loans are not eligible for the
tax incentives. Opportunity Fund investments in real estate are subject to a substantial rehabilitation
requirement.
6. EXAMPLES
OF
POTENTIAL
OPPORTUNITY
FUNDS
1. A $100 million national private equity fund that provides growth capital to lower middle
market operating businesses located in Opportunity Zones.
2. A $10 million local fund that provides the equity capital for the $100 million
redevelopment of a closed shopping mall into a mixed-use development that includes
new neighborhood retail and workforce housing.
3. A $20 million disaster area fund that develops and leases new affordable housing for
residents displaced by the 2017 hurricanes and forest fires.
However, there are at least three strategies that allow a qualified opportunity fund to be
open to its entire community, including non-accredited investors:
1. Real estate fund: A fund whose primary business is investing in real estate and 90% of
whose assets consist of real estate in an opportunity zone will be a qualified opportunity
fund and will be exempt from the burdensome regulations of the Investment Company
Act of 1940 (the “1940 Act”), which paves the way for the fund to raise capital via a
direct public offering – making it a true community investment fund.
7. ADDITIONAL
EXAMPLES
OF
POTENTIAL
OPPORTUNITY
FUNDS
2. Small business holding company: This type of fund is exempt from the 1940 Act if most of
its assets comprise controlled or majority-owned subsidiaries – the idea being that the fund
is in whatever business its subsidiaries are in, rather than in the securities investment
business. Again, if 90% of its holdings are businesses in opportunity zones, it will also be a
qualified opportunity fund.
3. Intrastate fund: A closed-end fund of up to $10 million, all of whose investors reside in
the same state, is eligible to seek an exemptive order from the SEC that allows it to raise
community capital via a direct public offering and while avoiding all or most of the 1940
Act’s regulations. Such a fund could invest in either business or real estate in opportunity
zones and thereby also become a qualified opportunity fund.
With any of these strategies, a community-scale fund can open up the opportunity for
community ownership of community assets, with everyone able to participate on a level
playing field, and everyone able to reap the profits from local ventures.
8. FAQ
FROM
POTENTIAL
INVESTORS
IN
OPPORTUNITY
FUNDS
How does a taxpayer become certified as a Qualified Opportunity Fund?
To become a Qualified Opportunity Fund, an eligible taxpayer self certifies. (Thus, no approval or
action by the IRS is required.) To self-certify, a taxpayer merely completes a form (which will be
released in the summer of 2018) and attaches that form to the taxpayer’s federal income tax return
for the taxable year.
I sold some stock for a gain in 2018, and, during the 180-day period beginning on the
date of the sale, I invested the amount of the gain in a Qualified Opportunity Fund. Can I
defer paying tax on that gain?
Yes, under § 1400Z-2(a)(1) of the Internal Revenue Code, you may elect to defer the tax on some or
all of that gain. If, during the 180-day period, you had invested in one or more Qualified Opportunity
Funds only an amount that was less than your entire gain, you may still elect to defer paying tax on
part of the gain, up to the amount that you invested in that way.
9. HOW CAN I GET MORE INFORMATION ?
Over the next few months, the Treasury Department and the Internal Revenue Service will be
providing further details, including additional legal guidance, on this new incentive. More
information will be available at Treasury.gov and IRS.gov.
1. https://eig.org/opportunityzones
2. https://www.cdfifund.gov/pages/opportunity-zones.aspx
3. Map of Opportunity Fund
4. https://home.treasury.gov/