What Cost Segregation Professionals Need to Know About Opportunity Zones: The Tax Cuts and Jobs Act of 2017 created Opportunity Zones (“OZ”) which are specifically designated geographic districts that allow investors to receive hefty tax breaks. Investors can defer and reduce capital gains taxes on existing investments, and pay no capital gains taxes on new investments by investing in Opportunity Funds.

1. Presenters
TCJA –Qualified
Opportunity
Zones
October 24, 2019
Ron Wainwright, CPA, MST
Partner and National Leader, Credits &
Accounting Methods
919.782.1040 (o)
rwainwright@cbh.com
Presenter

2. Ron Wainwright, Jr., CPA, MST
Tax Partner & National Leader,
Credits and Accounting Methods
Meet the Speaker
“ A Tax Partner with more than 25 years of experience
in the area of taxation, Ron serves a diverse client base
including multi-national, public and closely held
companies. Clients who rely on Ron’s guidance inhabit a
number of industries including manufacturing,
distribution, technology and life sciences, real estate
and construction, and private equity.
Based in the Firm’s Raleigh office, Ron guides clients
through a number of taxation matters including
international and domestic tax provisions, FIN 48, tax
controversy and complex transactional matters. He is
also a member of THInc, the Firm’s specialty practice
focused on guiding growth through innovation. ”

3. Executive Summary
2
The Tax Cuts and Jobs Act of 2017 created Opportunity Zones (“OZ”) which are specifically designated
geographic districts that allow investors to receive hefty tax breaks
Investors can defer and reduce capital gains taxes on existing investments, and pay no capital gains taxes on new
investments by investing in Opportunity Funds
The first set of regulations were issued in October of 2018. The second set of proposed regulations were
released by the Treasury Department on April 17th of 2019. These regulations provide new flexibility and more
clarity for investors to utilize the tax break.
Key takeaways from the second round of regulations include:
• Flexibility in the 50% Gross Income Tests – for example, a business can qualify if 50% of its employees’
hours or wages are in the zone
• Funds have 12 months to reinvest proceeds of selling opportunity zone investments into new
investments
• Debt-financed distributions are approved so long as the distribution does not exceed the investor’s basis in its
QOF
• After the 10 year holding period, funds may sell individual assets and distribute those gains to investors
• Leased land, such as tribal lands and municipal leased lands, may be treated as qualified opportunity zone
business property

4. Opportunity Zones
Legislative History and Purpose

5. Opportunity Zones: Overview  Opportunity Zones (OZ)
Program - sec. 13823 - in
Federal Tax Cuts and
Jobs Act (H.R.1), passed
December 2017
 Tax incentives for
qualified investors to
re-invest unrealized
capital gains into low-
income communities
 Legislative Intent: Drive
new growth capital to
economically-distressed
areas and projects
5

6. Opportunity Zones: Tract Section
The zones chosen for each state were selected by that state’s Governor.
 The result is a varying degree of economic distress among the zones
 This creates varying amounts of investor appeal in the investment
• As with all RE, some zones are “hotter” than others and were able to draw investment dollars
quickly. Investors fears for other areas have caused delays in investment
 Investors who wait too long to invest will not be able to reap the full benefits of
the program based on the timeline, as we will discuss later.

7.  More than 1,000 low-income census tracts to consider for 252
candidate spots
 NC Selection Principles:
 At least one zone in every county
 25 percent of each county’s low-income tracts
 Priorities:
 Tracts with state industrial site development initiatives
 Tracts affected by Hurricane Matthew
 Prioritize local recommendations &development goals
Example:
NC Opportunity Zones: Tract Selection
7

8. N O R T H C A R O L I N A
OPPORTUNITY ZONES 8

11. Opportunity Zones Basics
11

12. Qualified Opportunity Fund (“QOF”)
 Investment vehicle organized as an entity taxable as a corporation or
partnership for purpose of investing in Qualified Opportunity Zone (“QOZ”)
property
 Must be organized in one of the 50 states, DC or U.S. possession
 Can be pre-existing entity as long as other tests are met
 QOF must hold at least 90% of its assets in QOZ property (computed by
based on average amounts held as of 6/30 and 12/31 each year)
 QOF must be self-certified by taxpayer by submitting Form 8996
 Organizing documents must include statement that purpose of entity is to invest
in QOZ property, & include description of QOZB(s) it expects to engage in
12

13. Qualified Opportunity Zone property
QOZ Stock:
Stock in domestic corp.
Acquired after 12/31/17 at
original issue, solely for cash
QOZ business when stock
issued & during substantially all
of QOF’s holding period
QOZ Partnership Interest:
Capital or profits interest in
domestic partnership.
Acquired after 12/31/17 at
original issue, solely for cash
QOZ business when interest
issued & during substantially all
of ---QOF’s holding period
QOZ Business Property:
Tangible property used in
trade/business of QOF
Acquired after 12/31/17 by
purchase
Original use commences with,
or substantially improved by
QOF
Substantially all of use of
property is in QOZ for
substantially all of holding
period
13

14. Qualified Opportunity Zone Business (“QOZB”)
Trade or business in which:
 Substantially all (meaning at least 70%) of the tangible property owned or
leased is QOZ business property
 At least 50% of total gross income is derived from active conduct of a
business
 Substantial portion of intangible property is used in active conduct of such
business
 <5% of the average of aggregate adjusted basis of property attributed to
nonqualified financial property (“NQFP”)
 No portion of investment is to be used in so called “sin business”
14

15. Prohibited QOZ Businesses, §144(c)(6)(B)
Private or commercial golf
course
Country club
Massage parlor
Hot tub facility
Suntan facility
Racetrack
Other facility used for
gambling
15

16. Opportunity Fund
• An Opportunity Fund (“OF”) is an investment vehicle that specializes in aggregating private investments and deploying that
capital in an OZ
• OF TaxDeferral Timeline:
2018 Year5 Year7 Dec. 31,2026 Year10
Gains rolled into an OF
within 180 days of sales
Tax on original gain is reduced
by an additional 5%, to 15%
Upon sale, no tax on post
acquisition gains/OF interest
Tax on original gain is
reduced by 10%
Deferred tax on original gain is
due. Investor need to pay tax on
85%*Original Capital Gains
Opportunity Fund Incentives
1 Deferral of Capital Gains Taxes 2 Step-up In Basis 3 Permanent Elimination
Capital gains from the sale of any
asset (if reinvested within 180 days)
are deferred until the sale of the new
investment, or December 31, 2026,
whichever is earlier
Any investment re-invested and held for 5
years gets a tax basis increase of 10%, and
any investment held for 7 years gets a tax
basis increase of 15% -- thereby reducing the
original capital gains tax by that amount
Investments held for 10 years will pay
no capital gains tax on the post-
acquisition gains. This
permanent exclusion only applies to
the gains accrued in an OF
Opportunity Fund Incentives

17. Section 1031 Versus Opportunity Zones
Opportunity Zone investments provide substantial tax benefits compared to Section 1031
Comparison of Section 1031 & Opportunity ZoneFund
Section 1031 Opportunity Zone Fund
Eligible asset classes Only real assets held for productiveuse Any
What needs to be invested? All Proceeds Only Capital Gains
Investment timing Within 180 Days Within 180 Days
Intermediary required? Yes No
Tax Benefits
• Can delay tax indefinitely, but capital
gains are fully taxable at the time of
sale of the new property
• Heirs get step up in basis to the
market value, but can eliminatetax
up to the estate tax exemption
• OZ reinvestments receive a 10%
increase in basis after 5 years,and
15% after 7 years
• Capital gains tax are deferreduntil
Dec 31, 2026
• Zero capital gains tax after 10 years

18. Case 1 Case2
65% Debt
Cash Value of Depreciation
Cash Value of Depreciation2
10 YearTotal
Section 179 Expensing $1,000,000
Accelerated Depreciation $5,000,000
Straight Line Depreciation $3,160,780
Total Tax Shield $9,160,780
Tax Saving $4,552,541
Depreciation on OZ investments can offset other income; OZ legislation has no depreciation recapture after 10 years
• Assuming investor A has invested in an OF. Project SHS is one of its investments.
• Assumptions: a) Combined Income Tax Rate: 49.7%1; b). Section 179 Immediate Expensing: $1,000,000;
• c) Straight Line Depreciation Recovery Period: 39 years; d). Accelerated Depreciation Recovery Period: 5 years
Notes: 1. Assume investor A is subjected to the top marginal federal, state and city tax rate of NYC. Combined income tax rate includes 37% federal income tax rate,
and top marginal state and city tax rate of 12.7%. 2. The amount of cash value of depreciation is calculated based on Virtua’s Springhill Suites Avondale project.
35%Equity
56.9% CashValue of
Depreciation overInvested Capital
10%
Equity
199.2% CashValue of DepreciationoverInvested Capital
90%Debt
Cash Value of Depreciation over Invested Capital Under Different LeverageLevels:

19. 50% Gross Income Safe Harbor Tests
4
EmployeeHours Employee Wages
>=50% of its employees/independent contractors’
hours are performed within the qualified OZ (“QOZ”)
>=50% of its employees/independent contractors’
wages are from services performed within the QOZ
Facts &
CircumstancesTest
>=50% of the gross income of a trade or business is
derived from the active conduct of a trade or
business in the QOZ
Flexibility in the 50% Gross Income Tests
In order to be a “qualified business entity”, a corporation or partnership must derive at least 50% of its total gross income
from the active conduct of a business within a QOZ. Three safe harbors1 and a facts & circumstances test are provided to
clarify the requirements of sections 1400Z-2(d)(3)(A)(ii) and1397C(b)(2).
-- The 2nd Round of Notice of Proposed Rulemaking
Meet One of Them to Qualify
Revenue Contribution
by Tangible Property
>=50% of the gross income is generated by tangible
property of the business in the QOZ and the
management or operational functions performed for
the business in the QOZ

20. 50% Gross Income Safe Harbor Tests
Active Trade or Business
• QOZBs must derive 50% of their gross income
from an “active trade or business” in the
opportunity zone.
• The Proposed Regulations specifically state that
the ownership and operation (including leasing)
of real property is the active conduct of a trade
or business.
• However, the Proposed Regulations also state
that “merely entering into a triple-net-lease” is
not an active trade or business.
-- The 2nd Notice of Proposed Rulemaking
2
0

21. 12 Month Reinvestment Period
Income Strategy
Lower ProjectedReturn
Development
Phase
Higher ProjectedReturn
Stabilized
Phase
7 Years
12 Month Reinvestment Period
If a QOF sells qualified opportunity zone property shortly before a testing date, that QOF should have 12 months
to bring itself into compliance with the 90% Asset Test.
-- The 2nd Round of Notice of Proposed Rulemaking
• The new rules allow
investors to pursue a full
growth strategy with higher
projected returns.
• Funds could potentially have
3-4 iterations during the 10
year holding period.
Interpretation
3 Years
3 Years
2
1
3 Years 4 Years
Growth Strategy
3-4 Iterations

22. Debt-Financed Distributions Allowed
Debt-Financed Distributions Allowed
The proposed regulations specifically approves a debt-financed distribution so long as the distribution does not
exceed the investor’s basis (as increased by the investor’s share of the debt) in its QOF
-- The 2nd Round of Notice of Proposed Rulemaking
Example
• On Jan 1, 2019, A and B form Q, a QOF partnership, each contributing $200 that is deferred under the section
1400Z-2(a) election to Q in exchange for a qualifying investment.
• On Nov 18, 2022, Q obtains a nonrecourse loan from a bank for $300. Under section 752, the loan is allocated
$150 to A and $150 to B. On November 30, 2022, when the values and bases of the investments remain
unchanged, Q distributes $50 to A.
• Analysis: A is not required to recognize gain because A’s basis in its qualifying investment is $150 (the original
zero basis with respect to the contribution, plus the $150 debt allocation). The distribution reduces A’s basis to
$100.
Reference: Section 1400Z-2(b)(1)(C)

23. Working Capital Safe Harbor
Increased Liberty to Qualify the 31 Month Working Capital Safe Harbor
The proposed regulations establish a working capital safe harbor under which a qualified opportunity zone
business may hold cash or cash equivalents for a period not longer than 31 months.
-- The 1st Round of Notice of ProposedRulemaking
The proposed regulations make two changes to the safe harbor for working capital. First, planned use of working
capital now includes the development of a trade or business in the qualified OZ….. Second, exceeding the 31-
month period does not violate the safe harbor if the delay is attributable to waiting for government action the
application for which is complete.
-- The 2nd Round of Notice of ProposedRulemaking
Interpretation
• Real estate businesses, especially developments will have more flexibility with unforeseen issues such as
delayed permitting and other municipal approvals, extreme weather events and national disasters.
• Businesses can also benefit from multiple overlapping or sequential applications of the 31-month working
capital safe harbor.

24. amortization. -- The 2nd Notice of ProposedRulemaking
× The original use requirement does not apply to land; land must be used in connection with the trade or
business of the QOF or QOZB
 Improvements made by the lessee to the leased property satisfy the “original use” requirement and are
considered purchased property for the amount of the unadjusted cost basis of suchimprovements
 A building or other structure has been vacant for at least five years prior to being purchased by a qualified
opportunity fund or qualified opportunitybusiness
 Property located in the qualified OZ that has not yet been depreciated or amortized by a taxpayer other than
the qualified OF or qualified OZ business
 Used property that has not been previously placed in a qualifiedOZ
Original Use Requirement
Example
More Clarity on Original Use Requirement
Qualified OZ business property means tangible property used in a trade or business of the qualified OF if the
original use of such property in the qualified opportunity zone commences with the qualified opportunity fund or
the qualified opportunity fund substantially improves the property.
-- SEC. 1400Z-2(d) of Tax Cuts and Jobs Act
The “original use” of tangible property acquired by any person commences on the date when that person or a
prior person first places the property in service in the qualified opportunity zone for purposes of depreciation or

25. was in a qualified opportunity zone.
For determining whether an entity is a qualified opportunity zone business, the threshold to the substantially all
test is 70%. With respect to owned or leased tangible property, the substantially all is 70%. The substantially all as
used in the holding period context is defined as 90%.
-- The 2nd Round of Notice of ProposedRulemaking
“Substantially All” Thresholds
-- SEC. 1400Z-2(d) of Tax Cuts and Jobs Act
More Clarity on “Substantially All” Thresholds
Qualified opportunity zone business means a trade or business in which substantially all of the tangible property
owned or leased by the taxpayer is qualified opportunity zone business property.
Qualified OZ business property means tangible property used in a trade or business of the qualified OF if during
substantially all of the qualified OF’s holding period for such property, substantially all of the use of such property
Interpretation
• As a qualified OZ business, more than 70% of the property must be qualified OZ business property.
• As a qualified OZ business property, at least 70% of the property must be used in a qualified Opportunity Zone.
• Tangible property must be qualified OZ business property for at least 90% of the qualified OF ’s or qualified OZ
business’s holding period.

26. which the building is located.
How to Calculate a Substantial Improvement for Existing Buildings?
If a QOF purchases a building located on land wholly within a QOZ, under section 1400Z-2(d)(2)(D)(ii) a
substantial improvement to the purchased tangible property over 30 months is measured by the QOF’s
additions to the adjusted basis of the building.
Under section 1400Z-2(d), measuring a substantial improvement to the building by additions to the QOF’s
adjusted basis of the building does not require the QOF to separately substantially improve the land upon
• It is considered “Substantially Improved” if the property is improved
by over 100% of the basis within 30 months of acquisition.
• For existing properties, land value is excluded when calculating how
much to spend refurbishing the property1.
• This is a boon to projects located in urban areas, where land can be
a significant portion of total cost. Developers can spend less to
meet the “Substantially Improved" requirement.
Note: 1. Land is used in a business and not held forinvestment
-- Notice of Proposed Rulemaking
“Substantially Improved” Requirement
13
Building
$400K
Land
$600K
Building
$400K
Land
$600K
Renovations
≥$400K
Example
Substantially
Improved by
over 100%
Total Purchase
Price: $1MM
Interpretation

27. Raleigh Major League Soccer
“Malik, in an interview with Spectrum News,
said that he and Kane have 110 acres south
of downtown “under control” for a potentially
massive redevelopment, which could bring
a Major League Soccer stadium, hotels and
other amenities to a part of town that is
starting to see a wave of investment.”
REAL
Opportunity

28. REAL Opportunity
DC United Major League Soccer
28

29. Substantial Improvement
Requirement:
 A cost segregation study conducted just
after purchase will reduce the burden of
renovation spend required by reducing
the amount of 1250 property acquired
 This strategy may not work if the building
is in need of restoration for two reasons:
1. Reduced amount of 1245 property
value
Planning with Cost Segregation Studies
2. Renovation spend required to
improve the building may be so large
the investor will easily meet the
substantial improvement requirement
despite the reduction in the spend
requirement
 Absent this scenario it stands to reason
every building purchased to put into a
QOF should have a cost segregation
study conducted prior to renovations
being completed and post renovations as
well.

30. Hotel Purchase for QOF in OZ Zone
 A QOF has purchased a hotel that is located in
an OZ for $3,000,000.
 $1,000,000 is allocated to land and $2,000,000
is allocated to building
 Initially the fund plans to spend $2,000,000 to
renovate the building.
 However, they conduct a cost segregation study
before renovating which enables $500,000 of
the building property to be allocated to personal
property leaving $1,500,000 in real property.
 Now, the bar is lowered for the substantial
improvement requirement to $1,500,000 which
will give them greater flexibility and peace of
mind knowing the requirements of the QOF are
met
Example:

31. Once renovations are complete we
can conduct a cost segregation study
to segregate the costs of the
renovation spend and apply bonus
expensing.
The building should be capitalized in a
GAA for a long term hold. This will
allow any future determination to
demolish the building to continue
depreciation deductions and not
incorporate the remaining basis of the
building into the land value.
Next Steps for Our Hotel Example
Lastly, if the building is sold after the
10 year hold period two benefits
occur:
1. Any realized gain from building
appreciation over basis is not
taxed per the QOF incentive rules
2. No amount of the building is
recaptured on the sale

32. Outstanding Questions Where Guidance is Needed
32
• Ability of opportunity funds to qualify while
holding assets that are not technically “QOZ
property”:
• Cash from investors that hasn’t yet been
invested,
• Regulations to provide rules to ensure QOF has
reasonable period of time to reinvest proceeds
from sale of QOZ property, but will there be a
grace period with respect to the first 2 bullet
points?
• Application of QOZ rules to partnerships
• Whether partner’s share of QOF partnership
liabilities will result in add’l basis for gain
portion reinvested in QOF, or whether it will be
treated as add’l investment
• Treatment of refinancing proceeds that do not
exceed partner’s basis in QOF investment
• Deductibility of operating losses from QOZ
property, and effect on gain to be recognized
on sale of interest in QOF after 10 years

33. 33
Outstanding Questions
 Does the 50% test require at least half of gross receipts to arise from within the OZ or can any percentage of sales be
made outside the OZ?
 Will there be minimum requirements of business activity or jobs created within the OZ?
 Will the working capital safe harbor apply to operating businesses?
 Will existing businesses in OZs be able to use OZ benefits to improve or expand?
 How will the “active management” thresholds apply?
 What types of businesses are precluded due to the nonqualified financial property threshold?
 Is a “sin business” only at the retail level or does it apply to manufacturers and wholesalers and suppliers?
 Do state-legal cannabis businesses qualify?
 How will Treasury interpret the many and varied “substantially all” thresholds?
 What constitutes “original use” of property and must it be new property?
 How will vacant land be treated?
 Will leased property be qualified OZ property?

34. 34
Outstanding Questions Continued…
 Can properties or businesses be aggregated for purposes of the substantial improvement test?
 What triggers the beginning of the 30-month period for the substantial improvement test and is it continuous?
 Will the basis rules work the same for OZ as they do for pass-throughs?
 How quickly must a QOF reinvest sale proceeds into qualifying tangible property or a qualified OZ business to remain
compliant with the QOF rules?
 Will comingled funds work?
 Do capital gains arising from transactions by the QOF or qualified OZ businesses owned by the QOF stay at the QOF
level or do they flow up to the QOF investors (including whether treatment will differ if the asset is held by the QOF for
at least ten years)?
 Will a step up in basis be allowable at the QOF level?
 Will investors be forced to exit the QOF to avoid taxation on capital gains after ten years?
 If gains are currently taxable and reinvested in the QOF, does this trigger a new holding period?
 How will depreciation recapture be treated?
 How will QOF investments be treated upon death?
 What constitutes reasonable cause to avoid penalties if the 90% of the test is not met;

35. 35
Outstanding Questions Continued…
 What could trigger an IRS determination that a fund is not a QOF?
 Will accountability reporting requirements measuring dollars invested, jobs created, and other criteria be required?
 What are the tax information reporting requirements?
 What are the IRS penalty procedures?
 What anti-abuse rules will be imposed?
 How will the IRS enforce the OZ program?

36. Thank you!
For more information regarding Opportunity Zones and related tax
incentives, please visit Cbh.com/OZ
Ron Wainwright, CPA, MST
Partner and National Leader, Credits &
Accounting Methods
919.782.1040 (o)
rwainwright@cbh.com
@ronwainwrightcbh