Opportunity Zone Series for Investors Part 1 of 4:
What You Need to Know About the Final Regulations and an Overview of What is to Come
The Opportunity Zone (“OZ”) tax incentives provide investors with potential opportunities to defer recognition of gains on sales of eligible assets, permanently reduce a portion of the deferred gains and permanently exempt any future gain with respect to reinvested proceeds.
Join Richard Schneider, Partner and Chairman of Cherry Bekaert’s OZ Task Force Team and Polly Hoxha, Senior Manager and Cherry Bekaert’s OZ Champion for Washington D.C., for a discussion on OZ incentives for investors. This is the first in a series of four podcasts highlighting the final regulations of this program.
Stay tuned for the remaining three OZ podcasts:
- Part 2 – Gains and Timing of Being Able to Invest
- Part 3 – Key Inclusion Events
- Part 4 – Final Post 10-yr Dispositions and How it Affects Investors
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HOST: Hello and welcome to the Cherry Bekaert podcast for real estate and construction, where we discuss developing trends and market dynamics as well as tax and accounting tips that could impact your business.
We are very excited to kick off a four-part series on Opportunity Zone regulations for investors, which will provide clarification and insight into key changes in the final regulations.
I'm Polya, a senior manager in our Washington, D.C. practice. I have been fortunate to be able to sit in on the IRS hearings leading up to the final regulations.
I'm here today with Rick Schneider, a seasoned real estate professional, tax partner, and the chairman of our Opportunity Zone task force. Thanks for joining us today, Rick.
RICK SCHNEIDER: I'm very glad to be here and certainly to address our podcast series.
HOST: Today, we will give you some teasers on our upcoming episodes led by real estate professionals and experts from across our firm.
Now listeners, before we get started, how many of you have read all 544 pages of the final Opportunity Zone regulations?
I'm guessing that not everyone is raising their hand, but that's okay because you don't have to. We've got a fantastic lineup of professionals to provide you with guidance.
Rick, to refresh everyone's memory, can you provide us with a brief overview of the Opportunity Zone program?
RICK SCHNEIDER: Glad to. The Opportunity Zone program, enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017, was aimed at incentivizing investors with realized capital gains to reinvest those dollars in underserved communities across the U.S.
There are three tax incentives provided to investors. First, the ability to defer recognition of gains on the sale of assets.
Second, a permanent reduction in a portion of the deferred gain to be recognized. Third, a permanent exemption on future gains with respect to reinvested proceeds.
An investor accomplishes this by investing their gains in a Qualified Opportunity Fund (QOF). This is an investment vehicle specifically focused on making investments in Qualified Opportunity Zone Businesses and property.
HOST: Many of our upcoming podcast topics will focus on questions from clients that wish to invest in these Qualified Opportunity Funds, or QOFs, as well as questions we've heard in the marketplace.
Can you give us a sneak peek at the upcoming podcast series that covers eligible gains and the timing of the investment of those gains?
RICK SCHNEIDER: Certainly. Katherine Bazley and Michael Elliott will be leading that discussion.
They will be addressing the flexibility that the IRS provided with regard to the definition of eligible gains.
They will also cover the very favorable rules around the timing of when investors have to invest those proceeds into a Qualified Opportunity Fund, particularly as it relates to flow-through entities.
This ensures that investors actually have information relative to the gains realized by those funds and are then able to reinvest them in a timely manner.
HOST: That sounds like a great episode for folks to listen to. We fielded a lot of questions surrounding inclusion events.
What are inclusion events, and why do listeners need to listen to our podcast on how inclusion events are addressed in the final regulations?
RICK SCHNEIDER: Inclusion events are transactions after an investor has made their investment in a fund that could trigger the deferred gain.
It is very important for investors to be careful about the transactions they enter into, like transfers or gifts of an investment in a Qualified Opportunity Fund, because those types of transactions could trigger the gains.
If triggered, they wind up paying tax early. Shannon Mowery and Mark Coulter of our team will be addressing that.
They will also talk about when those triggering events occur and what investors can do to help plan and find solutions for addressing the gains they have recognized.
HOST: Folks really need to listen in on that podcast to beware of any possible tax consequences.
RICK SCHNEIDER: It really is important to make sure that they don't trigger the gains ahead of time, intentionally or unintentionally.
HOST: At the IRS Opportunity Zone hearings, we heard a lot of comments regarding confusion surrounding an investor's ability to exit from a fund at the 10-year mark. How was this addressed in the final regulations?
RICK SCHNEIDER: At those hearings, this was a very significant issue with regard to the first round of regulations.
I think the IRS did an admirable job of really listening to feedback and came out with very favorable rules to address how someone can exit out of a fund.
They addressed how to be exempt on the gains, whether that gain is realized at the investor level, the fund level, or even at the Qualified Opportunity Zone Business level.
All these gains are going to be exempt for purposes of exiting, which is very favorable. We're going to have Ron Wainwright and Jason Horford of our team address those rules for folks.
HOST: We have some excellent topics to be covered during the investor series. Cherry Bekaert will also have a podcast series involving fund-level topics.
What topics related to Opportunity Zone funds can listeners expect to learn more about during the fund series?
RICK SCHNEIDER: Yes, the fund series will be our second part. We're focusing on a deep dive into certain rules regarding funds, such as operating in a Qualified Opportunity Zone Business and what that means.
We will cover specific rules dealing with real estate and the substantial improvement rules, as well as the timeframe in which funds have to invest in real estate and cause those substantial improvements to be created.
Additionally, we will discuss the definition of a triple-net lease and whether they qualify as a trade or business for purposes of these rules.
Finally, we will discuss operating a business in an Opportunity Zone, particularly the requirement that 50% of the income must be in the Opportunity Zone. How is that defined, and what are the safe harbors with regard to that?
HOST: Our listeners have a lot to look forward to.
RICK SCHNEIDER: I hope so.
HOST: All right, well that wraps up our first podcast. Thanks for listening in.
Stay tuned for our next podcast where Katherine Bazley and Michael Elliott will delve deeper into eligible gains and the timing of those gains.
We look forward to having you join us again. In the meantime, if you have any questions or need further information, please visit us at cbh.com and enjoy your day.
