The new tax law presents new opportunities for gain deferral, but also eliminates like-kind exchanges for personal property.

1. Opportunity Funds

2. Overview
• The Tax Cuts and Jobs Act of 2017 (the “Tax Cuts Act”), enacted
December 22, 2017 and codified in new Code Section 1400Z, includes a
new incentive for investments in a qualified opportunity zone.
• The chief executive of each state and the District of Columbia will nominate
communities, subject to certain statutory limitations.
• The new tax law allows investors to defer paying tax on capital gains if
those gains are invested in Opportunity Zones
• The original deferral is temporary.
• The gain should be recognized on the earlier of the date the investment in the
Opportunity Fund is sold, or December 31, 2026.

3. Overview - Benefits
• Long-term investments receive reduced capital gains taxes
• 5 years – basis increased by 10 percent of the amount of the gain
deferred
• 7 years - basis increased by 15 percent of the amount of the gain
deferred
• 10 Years - investments held for at least 10 years will only be taxed on
the original gain that was deferred.
• Permanent exclusion of appreciation over original gain.
• Elective (may recognize the loss)

4. What are Qualified Opportunity Funds?
• Qualified Opportunity Funds are the vehicles that taxpayers will use to
invest their deferred capital gains in the Qualified Opportunity Zones.
• A Qualified Opportunity Fund can be organized as a corporation or a
partnership.
• investing in “qualified opportunity zone property” that holds at least 90% of
its assets in qualified opportunity zone property.
• Whether the fund holds at least 90% of its assets is determined
• on the last day of the first six month period of the fund’s taxable year, and
• on the last day of the fund’s taxable year.

5. What are Qualified Opportunity Funds?
• 90% of the funds assets should include:
• Equity interests in a corporation or partnership that is an opportunity zone
business (and issued directly by the corporation or partnership, not acquired
in secondary sales); or
• Tangible property (real or personal) located in the opportunity zone that is
either:
• First used by the fund or,
• Substantially improved by the fund (100% of cost over 30 months).
• This “substantially improved” clause is very restrictive, but could possibly be circumvented
buy purchasing equity interests in a real estate development business that owns or develops
property in an opportunity zone.

6. What are Qualified Opportunity Funds?
• Apart from the exclusion of a few “sin” businesses, the activities and
projects Opportunity Funds can finance are broad.
• Funds can finance commercial and industrial real estate, housing,
infrastructure, and current or start-up businesses.
• The fund cannot purchase the following businesses: commercial golf
courses, country clubs, massage parlors, hot tub facilities, suntan
facilities, racetracks or other facilities used for gambling, or any store the
principal business of which is the sale of alcoholic beverages for
consumption off premises.

7. Opportunity Zone Business Property
• A business is an opportunity zone business if:
• Substantially all of its tangible property is located in the opportunity zone;
• At least 50% of its gross income is derived from operations in the opportunity
zone;
• A substantial portion of its intangible property is used in its operations in the
opportunity zone; and
• Securities comprise less than 5% of its total assets by tax basis.

8. Example
• On January 2, 2018, AB Corp sells property to an unrelated party - gain
is $1 million,
• AB Corp then reinvests in a qualified opportunity fund
• AB Corp sells its investment in the fund on April 2, 2021 for $1,500,000.
Since ABC Corp held its investment for under 5 years, its basis in the
investment is $0.
• In its 2021 tax year, AB Corp must recognize the deferred gain of $1
million as well as the $500,000 in appreciation.

9. Example
• Assume same facts as above, except that AB Corp holds the investment
for 10 years.
• Since the investment is held for more than 10 years, AB Corp’s basis
increases from $0 to fair value.
• The additional $500,000 in appreciation is not taxed.

10. How Rental Housing Qualifies
• All rental real estate, including residential real estate, located in
Opportunity Zones appears to be eligible to be a Qualified Opportunity
Zone property as long as the real estate is newly constructed, or
acquired after Dec. 31, 2017 and substantially improved.
• Real estate is substantially improved for if during any 30-month period
following acquisition of such property there are additions to basis that
exceed the adjusted basis as of the beginning of the 30-month period.
• This is generally a much higher standard than the substantial improvement
standard under the low-income housing tax credit which requires a taxpayer
to spend $6,800 per unit or 20 percent of adjusted basis over a 24-month
period.

11. Next Steps
• Over the next few months, the Treasury Department and the Internal
Revenue Service will be providing further details, including additional
legal guidance.
• Treasury will provide the application for Opportunity Zone Funds in
summer of 2018.
• More guidance on:
• The period of time to reinvest the return of capital from investments in
qualified opportunity zone stock and qualified opportunity zone partnership
interests.
• How to reinvest proceeds received from the sale or disposition of qualified
opportunity zone property.
• Are real estate development companies created to invest in property in the
Opportunity Zones required to meet the “substantial improved” requirement
as are individual pieces of tangible property?

12. Florida Opportunity Zones

13. Panama City

14. Port St. Joe

15. Southeast

16. Birmingham

17. Downtown Birmingham

18. Tuscaloosa

19. Downtown Tuscaloosa

20. Mobile

21. Mississippi Gulf Coast

22. Contact
• Jeff Armstrong
• jeff@30aCPA.com

23. Resources
• Final bill language
• IRS Revenue Procedure