KMK Law Real Estate Blog

On December 31, 2017, new Internal Revenue Code (“Code”) Sections 1400Z-1 and 1400Z-2, passed as part of the Tax Cuts and Jobs Act of 2017, became effective. These two Code sections establish the framework for the new Opportunity Zone (“O-Zone”) incentives. Generally, a gain realized from the sale or exchange of property with an unrelated person can be deferred if invested in a Qualified Opportunity Fund (an “O-Fund”) within 180 days of the sale or exchange. Investment in the O-Fund will defer gain on the sale or exchange until the earlier of the subsequent sale or exchange of the investment in the O-Fund or December 31, 2026. While deferring the tax event of the initial gain is valuable in itself, the new code sections provide greater incentives on investments held for long periods. If, for instance, an investment is held for longer than five years, a basis step-up can be realized.[1] If, however, the investment is held for at least ten years, the basis of the investment shall be equal to the fair market value of the investment on the date that the investment is sold or exchanged, so that no gain is recognized at that time.

On April 18, 2018, Ohio received a determination from the U.S. Department of the Treasury and the Internal Revenue Service (the “IRS”) approving 320 census tracts for Opportunity Zone designation that had been proposed by the State of Ohio. Several Cincinnati Neighborhoods are now included in so called O-Zones, including the riverfront portion of the Central Business District, Over-The-Rhine (including Pendleton), and a large section of the West End. See the attached map for greater detail.

In order to take advantage of the incentives granted by O-Zones, the first step for a prospective investor would be the creation or identification of an O-Fund. O-Funds can take the form of a corporation or a partnership so long as at least 90% of its assets are held in qualified opportunity zone property. It is not entirely clear yet how an O-Fund will become certified, however, the IRS has indicated that a “self-certification” process is likely to be employed. The form for self-certification is set for release sometime in the summer of 2018. Until subsequent regulations and forms are promulgated, little can be known for certain at this time regarding the practical compliance with the O-Zone program outside of what is in the Code. This is not to say, however, that an investor ready to take advantage of this program is left without options. The foundational step to realizing the benefits of an O-Zone, the creation and investment in an O-Fund, can be accomplished now pending the circulation and subsequent filing of the self-certification form.[2]

 [3]

[1] The basis step-up of an investment held for at least five years is 10% and if held for at least seven the step-up basis is increased by 5% for a total of 15%.

[2] The Code makes no specific reference to a self-certification process; it is likely, however, that subsequent regulations will impose such a requirement, as the IRS has indicated (see the IRS Frequently Asked Question page regarding Opportunity Zones). Therefore, an O-Fund can be created now provided that the Code is properly complied with as it is the only guiding legislation or regulation currently governing the matter.

[3] This map can be located at https://development.ohio.gov/bs/bs_censustracts.htm