The Tax Cuts and Jobs Act that established Opportunity Zones (OZs) will be five years old in December of this year. New legislation now before Congress proposes some significant changes that should be good for both current and future investors.
First, a little history on this legislation: following enactment of the original bill in 2017, two years passed before all the rules governing implementation were put in place – what the funds were, where they could build, what qualified as an investment and what didn’t, and so on. This was important because the clock started ticking on certain tax benefits right from that beginning, including the deferral of capital gains taxes and a step-up in the basis for an investment in an OZ fund. Two years were basically lost.
The new bill would reset the clock to help make up for that lost time. Known as the Opportunity Zones Improvement, Transparency, and Extension Act (the “Act”), it was introduced by Senators Cory Booker (D-NJ) and Tim Scott (R-SC) and Representatives Ron Kind (D-WI) and Mike Kelly (R-PA), respectively, in April 2022. Like the first OZ bill, it has bipartisan support. On the first issue, that of capital gains taxes, it addresses the current shortcoming by extending the deadline for deferring to December 31, 2028 from December 31, 2026, good news for investors who now have an extra two years before the taxes come due.
It also extends eligibility for the step up in basis for an investment in a QOZ. The original legislation had an 85% step up in basis – if you owed $100 in taxes you only had to pay $85.00, a 15% reduction. In 2021, that went down to 10% reduction. As of 2022, there is no tax reduction at all. The new legislation would change this, giving all investors the 15% reduction and making that effective retroactively. Everyone benefits.
There is also the question of transparency. OZ fund critics have pointed out that nothing in the original bill required funds to report how they were investing. The new legislation provides more transparency by requiring disclosure on things like the number of jobs created and the dollar value and nature of investments made by the funds. We’re all for it. We think that as a matter of public policy, and public trust, more transparency is better. We’re taxpayers, too, and like everyone else we would like to see our tax dollars spent the way they were meant to be spent.
Finally, the legislation would phase out some OZs based on an assessment of income levels in the zones, but most funds will be grandfathered in.
We think this legislation makes a lot of sense. In fact, Sean Raft, our Chief Administrative Officer and General Counsel, was part of the national working group helping to advise the treasury and the IRS on ongoing OZ fund legislation. While it’s not a done deal yet, the signs look good for passage this year. We’re keeping a close eye as it moves through Congress and we’ll keep you informed.
To find out more about the role an Opportunity Zone fund can play in diversifying your portfolio, contact us today!
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With respect to any performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. All investments carry the risk of loss of some or all of the principal invested. Assumptions are more fully outlined in the Offering Documents/ PPM for the respective offering. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment.
These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. All offerings are intended only for accredited investors unless otherwise specified.
Past performance are no guarantee of future results. All information is subject to change. You should always consult a tax professional prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum issued by Issuer, or one of its partner/issuers. Issuer does not warrant the accuracy or completeness of the information contained herein. Thank you for your cooperation.
Real Estate Risk Disclosure:
- There is no guarantee that any strategy will be successful or achieve investment objectives including, among other things, profits, distributions, tax benefits, exit strategy, etc.;
- Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
- Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- Potential for foreclosure – All financed real estate investments have potential for foreclosure;
- Illiquidity – These assets are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
- Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
- Stated tax benefits – Any stated tax benefits are not guaranteed and are subject to changes in the tax code. Speak to your tax professional prior to investing.
Opportunity Zone Disclosures
- Investing in opportunity zones is speculative. Opportunity zones are newly formed entities with no operating history. There is no assurance of investment return, property appreciation, or profits. The ability to resell the fund’s underlying investment properties or businesses is not guaranteed. Investing in opportunity zone funds may involve a higher level of risk than investing in other established real estate offerings.
- Long-term investment. Opportunity zone funds have illiquid underlying investments that may not be easy to sell and the return of capital and realization of gains, if any, from an investment will generally occur only upon the partial or complete disposition or refinancing of such investments.
- Limited secondary market for redemption. Although secondary markets may provide a liquidity option in limited circumstances, the amount you will receive typically is discounted to current valuations.
- Difficult valuation assessment. The portfolio holdings in opportunity zone funds may be difficult to value because financial markets or exchanges do not usually quote or trade the holdings. As such, market prices for most of a fund’s holdings will not be readily available.
- Capital call default consequences. Meeting capital calls to provide managers with the pledged capital is a contractual obligation of each investor. Failure to meet this requirement in a timely manner could elicit significant adverse consequences, including, without limitation, the forfeiture of your interest in the fund.
- Opportunity zone funds may use leverage in connection with certain investments or participate in investments with highly leveraged capital structures. Leverage involves a high degree of financial risk and may increase the exposure of such investments to factors such as rising interest rates, downturns in the economy or deterioration in the condition of the assets underlying such investments.
- Unregistered investment. As with other unregistered investments, the regulatory protections of the Investment Company Act of 1940 are not available with unregistered securities.
- It is possible, due to tax, regulatory, or investment decisions, that a fund, or its investors, are unable realize any tax benefits. You should evaluate the merits of the underlying investment and not solely invest in an opportunity zone fund for any potential tax advantage.
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