OPPORTUNITYZONE REPORT

STARTING YOUR OWN

FEB 2019

OPPORTUNITY FUND

KEY TAKEAWAYSSTARTING YOUR OWN

OPPORTUNITY FUNDAny individual taxpayer, group of people or business entity can create an Opportunity Fund.

Experts recommend having at least $1 million in gains in order to start your own fund.

Establishing your own fund gives you better control over the types of properties, businesses and ventures the fund invests in.

Make sure you are only investing gains that you won’t need to realize for seven to ten years.

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Can’t find a fund that aligns with your values and goals? Consider starting your own.

Don’t Settle:Create Your Own Fund

OpportunityFund Eligibility

Like many successful investors, you are always looking for ways reduce to your capital gains and related taxes. You can hunt through your invest-ment statements and look for losses to “harvest.” You can increase your charitable gifting through a donor advised fund or trust. You can transfer your gains into a 1031 Like-Kind Exchange assuming your gains happened to be derived from real-es-tate. Each of these approaches has limitations.

Now there’s a new gain deferral option can save you more on taxes, offer substantial up-side potential and help improved underserved communities. Enter Qualified Opportunity Funds (QOFs)—a byproduct of the landmark 2017 Tax Cut and Jobs (TCJA). QOFs are more flexible

In theory, anyone — an individual, a group of people or a business entity — can create a fund of any size by setting up a qualifying entity and filing the proper paperwork at tax time. The list of designated Qualified Op-portunity Zones in which a Fund may invest to meet its investment requirements is locat-ed at Notice 2018-48.

Experts recommend having at least $1 mil-lion in gains on hand in order to set up your own opportunity fund. Again, make sure that’s money you won’t need to tap for at least seven to ten years.

According to Blake Christian, CPA, a tax partner at Los Angeles, California-based HCVT, LLP, the type of entity you want to form depends on the type of investments your fund plans on making. “We’re gen-erally advising funds that will be investing in real estate to form LLCs and elect to be treated as partnerships for tax purposes. This allows tax losses to flow through to the QOF owners and any debt will increase their ability to deduct depreciation and other startup losses,” said Christian.

than 1031s (see related article on this website) and are more rewarding (financially and emo-tionally) than many other traditional tax deferral strategies. Sounds great, but finding a QOF that aligns with your financial needs, timing and values can be a challenge.

Since you cannot invest your gains directly into businesses or properties within a designated op-portunity zone, many investors believe they must settle for an “okay” fund that meets at least some of their criteria.

Don’t settle! Consider starting your own oppor-tunity fund. The process is not as complicated as you and your advisors might think.

“Taxpayers investing in (or starting) operating businesses will want to evaluate both part-nership and C Corp structures – depending on expected performance and whether the entity may operate in a state other than the state of residence for the ultimate fund owners,” added Christian, who has helped clients set up half a dozen opportunity funds over the past year—including an individual who had a $100 million-plus gain. Christian said C Corps can also make sense if your fund wants to obtain small business stock classification. When it comes to forming S-Corps, Christian advises against doing so.

“We see little benefit and lots of issues when using an S Corp structure for an Opportunity Zone Fund,” he added.

A QOF must be a corporation or a partner-ship, agreed Keith Schroeder, CPA, in his widely followed Wealthy Accountant blog.

“An LLC electing to be treated as such for tax purposes should pose no problem as it isn’t specified or excluded in the Code. An S corporation is not an option. Only a regular corporation or partnership can be [an op-portunity] fund,” Schroeder added.

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. . . the process is fairly simple. So, where do you put your money?””

Randy Hubschmidt, Managing Partner of Fortis Wealth

Finding the RightOpportunity Zones

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I want to reduce my taxes and make a good re-turn, but I also want to help people with my mon-ey. Opportunity360 and the Distressed Commu-nity Index are two promising tools that have been highlighted for Opportunity Zone evaluation. En-terprise Community Partners created Opportuni-ty360, which evaluates opportunities in a census tract according to such metrics as housing stabil-ity, education, health and well-being, economic security, and mobility. The Economic Innovation Group (EIG) developed a Distressed Community Index that captures a community’s performance over time and across zip codes.

As of press time, the answer is, No! A QOF can-not be organized for the purpose of investing in other QOFs, but Schroeder among other experts, believes the IRS may provide future regulation modifying the rules.

A list of Qualified Opportunity Zones (QOZs) is located at IRS Notice 2018-48. Also see The Treasury Department’s Community Development Financial Institutions Fund and The National Council of State Housing Agencies’ Opportunity Zone Fund Directory.

How do I know if I’ve selected the right areasin which to invest?

Can My Fund Invest inOther Opportunity Funds ?

NOTE: Experts say it is still unclear how the regulations will deal with the 15 percent basis step up since the full 10-year holding period may not be realized by December 31, 2026, on QOF investments that are purchased after January 1, 2018. Additional guidance is required from the IRS in this area.

Benefits to StartingYour Own Fund1.

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Other Criteria

As mentioned earlier, more than 8,700 locations across the U.S. have been certified as QOZs and they are eligible to receive capital from any qualified investor regard-less of where that investor is located. There are just some important considerations to keep in mind, including the 90-percent rule and the 50-percent rule.

Like all QOFs, your fund is required to keep 90 percent of its capital invested in projects located within a QOZ. Projects can include investing in new development, upgrading properties, funding start-up businesses or putting money toward other qualifying local initiatives. In fact, the only business QOFs may not invest in as of press time are: golf courses, massage parlors, hot tub facilities, country clubs, suntan facilities, racetracks and other gambling business and liquor stores.

Investments must also be limited to tangible property that’s used in a trade or business of the taxpayer and must meet the following requirements

NOTE: Intangible property is not a qualified investment for a QOF — only tangible property counts. Also, experts say that if you are running your own QOF, you cannot make an acquisition from a related party for your fund. As always, check with your advisors since some guidance pertaining to this area is still being worked out.

Use begins with the fund, or the fund substantially improves the property. Substantial improvements are defined as “additions to basis” for the property after acquisition during a 30-month period in which the basis is increased by an amount greater than basis at the beginning of the 30-month period.

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You self-certify: Simply fill out IRS Form 8996 and attach it to your corporate or partnership return. It’s as simple as that.

You’re in control: Starting your own fund gives you much better control over how your money is invested. Just remember, your fund you can invest in any project located within one of the 8,700 designated QOZ’s nationwide.

The 90% Threshold

The property is acquired after December 31, 2017 in a QOF.

Substantially all the use of the property must be within a QOF.

The goal is to make these funds accessible enough so large institutional aren’t the only participating,” explained EIG’s John Lettieri in a CNBC Report. EIG is widely credited with getting opportunity zone tax incentives included in the 2017 tax reform package.”

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AvoidingPenalties The 50% TestAs mentioned earlier, you face penalties if your fund does not maintain 90 per-cent of its assets invested within a QOZ. And when we use the term “investment,” we’re talking equity investments; they can’t be loans or other debt instruments.

To ensure that your fund meets the 90 percent threshold, Tony Nitti, a tax part-ner in WithumSmith+Brown’s National Tax Service Group explained in Forbes recently that a QOF must calculate the average percentage of its total assets in-vested in QOZ property at mid-year and at year-end. If the QOF has an “applica-ble financial statement” – similar to a 10K or audit – “then the fund has to measure each asset at its value as reported on that financial statement,” wrote Nitti. “If there is no applicable financial state-ment, the QOF will look to the cost of each asset,” he added.

Also, any business that your fund invests in must derive at least 50 percent of its gross income from within the designated opportunity zone.

So, your fund will have to be careful about investing in “hot” technologies or online ventures that typically have customers throughout the U.S., if not the world.

As of press time, IRS guidance gives QOFs 31 months to put their money to work. That means investors can theoreti-cally park their capital gains income in a fund and not have it actively invested in a QOZ for several years. Either way, the money will qualify for the tax deferral and capital gains tax break. Just make sure investors know they must remain invested in your fund for at least five years in order to exclude 10 percent of their gain from taxation. If they stay invested for seven years, they can exclude another 5 percent of their gain, and if they remain invested for 10 years, any gains generated by their investment in the fund are tax-free.

While there are still a wrinkles to be ironed out, EIG’s Lettieri maintains that QOZ investments are a big step up from Urban Enterprise Zones and other earlier federal tax programs that were designed to spur investment in distressed areas. For starters, the tax benefit QOF investors receive is not capped as it was under earlier programs. Plus the QOZ initiative touches far more communities than previous programs and investors only receive their full tax benefits if they stay committed to a QOF for the long haul.

As always, check with your advisors if opportunity zone investing is right for you. If so, there’s no better feeling than making a positive impact on a community while receiving a generous boost to your personal bottom line.

Conclusion

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Conclusion

Norwalk is a fast growing, business-friendly city with a sizable population of 90,000+. It is a vibrant destination with a proud populace and progressive city officials. We have a historic downtown, beautiful harbor, and plenty of access to transportation. We have emerging growth in the fields of health, retail, science and technology. The city has an actionable plan to modernize infrastructure, improve walkabili-ty, create jobs, add housing and enhance innovation and technology. A major neighborhood revitaliza-tion effort is already underway with major investors and developers involved. Blending mixed-use project density and transportation enhancements has uniquely positioned Norwalk for continuing in-vestment. Your fund should be a part of our success as the future unfolds.

Norwalk Redevelopment Agency125 East Ave, Norwalk, CT 06851(203) 854-7810

All expressions of opinion within this article are subject to change as rules and regulations pertaining to this subject matter are continually evolving. Content should not be viewed as personalized investment advice or as an offer to buy or sell any securities discussed. A professional adviser should be consulted before implementing any of the strategies discussed. All investment strategies have the potential for profit or loss. Content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. The City of Norwalk is not engaged in the practice of law, accounting or consulting.

©2019 — City of Norwalk, CT

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