To print this article, all you need to do is be registered or log in to Mondaq.com.
Tax Facts is the latest podcast from Buchanan Ingersoll &
Rooney around the world of tax law and new changes that have an impact
Companies and investors alike.
In our first episode Lisa Starczewski and Lafe Metz from Buchanan
Ingersoll & Rooney discuss the world of opportunity zones,
important deadlines for the program and what the future holds
This valuable tax incentive investment vehicle.
Lisa Starczewski is a Buchanan shareholder and chairwoman of
The company's tax department and the Opportunity Zones team. Lafe
Metz is also a Buchanan shareholder and chairman of the company
Practice group real estate.
In the following, Starczewski and Metz cover:
- The history of the opportunity zones and what was March 31, 2021
Deadline actually means. - How investors can still take advantage of this program.
- How the 2020 Census May Affect Opportunity Zones
Program. - What changes the COVID-19 aid packages in the
Opportunity Zones Program. - What impact could possible changes in tax rates and OZ regulations have?
Effects on the program.
You can listen to Tax Facts in many places: on Apple Podcast,
Google
Podcasts, Spotify, Pocket Casts and more.
Podcast transcript
Lafe Metz: Welcome to the first episode of
Tax facts from Buchanan Ingersoll and Rooney. That is a
Podcast on the world of tax law, the new changes that are having an impact
Companies and investors alike. My name is Lafe Metz and I am
Your host today. I am a Buchanan shareholder and chairman of
the company's real estate group. I am very happy to see you
my colleague Lisa Starczewski, who is also a shareholder
Buchannan and is also the chairman of our company's tax department
as chairman of our Opportunity Zones team. Lisa, thank you very much
for being here. I am excited to speak to you.
Lisa Starczewski: Of course, Lafe. It is a
Pleasure to be here.
Lafe Metz: Lisa, you are what I think is right
one of the world's leading experts on Opportunity Zone
is important and so it is a privilege for me to be here and
talk to you about it more. And I know there have been many
recent activity in the Opportunity Zone world, and there are some
Deadlines that will be important to many customers and others
Taxpayer. So can you tell us what time it is on March 31st?
about and why will our customers care?
Lisa Starczewski: Before I do that, just let me
Provide a very brief overview of the Opportunity Zone (OZ) program
and just make sure that all of our listeners are on the same page
Respect for what it is. The OZ program enables taxpayers who have
realized capital gains, for example, from a sale of shares, the sale
of real estate, selling a business, etc. to defer paying taxes
on this capital gain and instead invest it in an opportunity zone,
through what we call a qualifying opportunity fund, or a
QOF.
There are several tax breaks for this type of loan
Investment. One is the forbearance related to the tax itself
that original capital gain that is invested. This gain
will not be taxed until 2026. The second advantage is the fact that a
A portion of this invested profit may never be taxed
15% of this, depending on when the OZ investment is made.
And the third and perhaps most powerful benefit is
the fact that when a taxpayer makes and holds this type of investment
there has been none of the valuations on the for at least 10 years
Investments are always taxed.
The idea behind the program was to create incentives for people to move around
Bring money to targeted geographic areas in order to bring economic benefits
Improvement and prosperity in these places. There are 8,700
designated qualified opportunity zones in the United States and the United States
Areas.
Let me now return to your question about March
31st. The OZ program has a number of requirements that
must be met in order to receive the tax benefits I just described
apply. And many of the requirements set schedules for both
the original investor and the fund and the companies in which the fund invests
in. Regarding this original investor who realized
Capital gain and wants to invest in an opportunity zone that
The taxpayer has 180 days to make this profit and move
it into a qualified opportunity fund. The 180 day rules are
complicated. Special rules apply for transit
gain. There are exceptions and I won't go into all of them
from that. But the March 31 deadline is important because as part of it
the COVID-19 relief that the IRS provided to the OZ program, it
has extended this period of 180 days for investors, so that a
Taxpayers whose 180-day period would otherwise have expired,
You may still be able to use the program if you move the program
Money until March 31, 2021. Profit from 2019
continue to be eligible under this facility. It is important to remember
What has to happen by that date is the movement of the
Money in a qualified Opportunity Fund entity, not that money
must work in a zone. In a certain capacity in a
specific project. You only have to invest in the fund unit
until March 31st.
Lafe Metz: Can you say again how it works?
with the COVID-19 relief? So I think you said that
It's not just 180 days back in the past from here, so it's not
how it went from September 30th, 2020 until now. It achieved
further back than that. Can you say a little more about that?
Lisa Starczewski: It does. It reaches everyone
back to 2019 and indeed when it's pass-through profit when
It is a profit made in a partnership or an LLC or a
S-Corp or a certain trust, it may be a profit that has been realized so far
back as January 1st, 2019. So in many cases this may be old
gain. And it can be a win that taxpayers have already paid taxes
However, it is permissible to change these returns and have this tax refunded
when they make the decision to move the money by March
31., and they move the money into the fund
Date.
Lafe Metz: If i am an investor how do i do it?
Do you know if a qualifying opportunity fund is something?
Lisa Starczewski: So there is nothing
magically about a qualified opportunity fund unit compared to any other
Business entity so that a fund can be organized as a partnership
Company included in a partnership, of course in an LLC or as a
an S-Corp. So it's just a unit. There is nothing magical
about that. It doesn't have to have a specific number of owners,
apart from the fact that it cannot be a disregarded entity.
Lafe Metz: Many Thanks. And this is how we introduce ourselves
that I am someone who has a profit that I would like to invest
in an opportunity fund, but I haven't found one yet. Is it
possible to simply create one yourself and park the money there and
then continue to invest in another fund or zone later if I
find out later?
Lisa Starczewski: The answer is yes. The
Investor could set up his own, say partnership or LLC,
because this is the most common entity type used in this scenario
and park the money there by March 31st to meet the deadline and
then a couple of different things could happen. The money could be
withdrawn from this entity to another qualified
Opportunity Fund and there would be different requirements that
must be adhered to in relation to the time for this. It would restart
their watch for a 10-year hold period for exclusion from profits
ten years. What could also happen is that the fund can then search
Companies out there developing projects in opportunity
Zones. Because the fund can then invest in another company
that acts as the qualified opportunity zone business. fact is that
A two-tier structure almost always applies. So the
What the fund cannot do is invest in another qualifying fund
Opportunity Fund. That is not allowed under the rules.
Lafe Metz: Ok got it. So on March 31st
Deadline, we started talking about it because it was relief that
The IRS had offered in response to COVID-19. You try
Relax some of the deadlines. Is there any other type of relief?
has the IRS made available for the OZ program?
Lisa Starczewski: Yes, there is absolutely. So,
The relief for investors was only part of the relief for the IRS
provided in this latest release. They also provided relief with that
Fund itself as well as in companies in which the fund could be involved
what we call Qualified Opportunity Zone companies
or QOZBs you may hear about.
The fund itself is therefore subject to an investment standard of 90%.
Accordingly, 90% of his assets must meet certain requirements
Conditions. Essentially, they need to be used in a job
Opportunity zone, either through direct ownership of property or
Owned by Qualified Opportunity Zone Companies. When the fund
Failure to follow this 90% test, which generally applies to everyone
Six months, there is a fine that is imposed on them
Funds. And it was really difficult for funds that were
was founded in 2018-2019 and early 2020 to get the job done.
In some cases, construction has been suspended due to the pandemic. It
It was difficult to get permission. It was hard to visit
other regions and are looking for viable projects. And so did the IRS
decided to give significant relief on this 90% test.
For example, for a calendar year fund unit for the whole of 2020 and all
by 2021, that 90% will essentially not count for the purposes of this
Exam. The fund does not have to pass the test for this
Years.
In addition, there are a number of tests and requirements
the business level of the qualified opportunity zone. And there are
Requirements to significantly improve certain properties that they are
bought either by the fund or by the company. All of these
Schedules involved in these requirements have been made
to some extent alleviated in relief. I will not get
in all the gist of these rules, but the moral of the
Story here is that Fund and Qualified Opportunity Zone Company
have got significant breaks and have much longer runways too
Invest the money invested properly and develop it further
Projects in opportunity zones. For everyone who wants more
Information about the relief I have a customer
Advice that I wrote on the subject.
Lafe Metz: Switch that up a bit
The Opportunity Zone program was created in the Tax Cut and Jobs Act
from 2017 during the Trump administration. What's your feeling
about how the public perceives the program? Is that noticed?
as a Republican program? Is it something of Biden
Administration preferred and want to continue?
Lisa Starczewski: I think you just have to look
back into the history of the program to see that it is not
This is not a partisan program and this was not a Republican
Program, and it wasn't a Trump program. The OZ program was
in recent years for a variety of heavily politicized
Reasons. But the reality is that the idea behind this program
came to fame a few years ago with Sean Parker of Facebook, and
A think tank he created called the Economic Innovation Group.
And the point of this group and of Sean Parker many years ago
was trying to analyze how a change in tax policy could address and
Impact inequality. The OZ program received bipartisan support from
its inception and its inception was not in the tax cuts and jobs
Plot. Instead, the introduction of the legislation was in a separate part of
Legislation called the Investing and Opportunity Act, that was
introduced prior to tax reform by Republican Senator Tim Scott and
Democratic Senator Cory Booker. So there is absolutely one
Non-partisan story on the program and I believe it will continue
bipartisan support for the program.
Lafe Metz: Do you think there will be?
be any significant changes to the program during the biden
Administration?
Lisa Starczewski: Well, at first I think so
Biden and his administration have a real chance here
Correct the story related to the OZ program and repeat
Indeed, the program was the result of a bipartisan effort. you
were in some ways able to rename it and really promote its use
of the program to manifest the originally intended results. There
There was early speculation that the OZ program might be
eliminated under Biden. But that doesn't seem to be the direction
for Biden to come in or for Congress to come in. Instead what
They propose certain changes to the program
would create more transparency and give people a better one
Sense and a data-driven sense whether this program is or not
work and where it works and where it doesn't.
You know, we're moving the needle in on economic metrics
low income communities?
I think, as I said, that there is still widespread support,
However, there is a desire to pass additional or additional laws
regulatory guidelines. And I think we'll see that in one
from four or all four different areas. And i will do it
talk about it quickly.
- One is that Biden said he wanted to incentivize funds
Cooperate with nonprofits and other nonprofit organizations
Organizations and work together to create projects that are
focused on job creation and other local benefits. - The second area, and I think we will definitely see it
In some form, this is increased coverage by funds and skilled workers
Opportunity Zone company in terms of infusions of cash where
The money is used and then the results. How many jobs
was created? Which economic indicators have changed as a result?
the OZ investment? - The other thing we might see is changes to the tracks
yourself. There was a new census in 2020 and we can see some
legislative movement regarding the actual tracks - And the last thing is that there was a little bit of it
talk. I don't know if it's just wishful thinking or how
It's really about extending the 2026 deadline. And just nice
to expand the program. And of course if they did
In those deadlines, I said that 2021 is important and we are
Talking about it a little more would change because
2026 would be a little later. The profit could be
postponed longer and there would be more options for people
invest in qualifying opportunity funds and receive all of the tax
Services.
Lafe Metz: A concern that I heard
People go back to the question of whether the program is going to change
What happens under the Biden administration, if there is one?
Change the tax rate for investment income? Do you have any thoughts on that?
The?
Lisa Starczewski: There are a number of taxes
Changes that have been postponed. And there are a few of them
can significantly influence the OZ program, but does not necessarily have to be in a
negative way. So let's talk about increasing capital gains.
Yes, we have seen a very significant increase in capital gains. Law
Now it's mostly 20% plus 3.8% net investment
Income tax, i.e. 23.8%. And it could rise too high
43.4% if we look at the highest rate of income that could be imposed
on ordinary income, which could rise again to 39.6%, we add
that 3.8% right? So this is a really huge change in that
Capital Gain Rate. And investors will pay taxes on it
Whatever the amount of deferred profit in 2026, not the rate
Indeed, if the gain is realized, so it would be
subject to this increased rate if the rate is actually as high as
that in 2026.
But let's remember that at the end of 10 years if they
Maintain for 10 years that the entire increase in value is tax-free. The
In the end, use is worth much more economic value, if what
You save 43.4% and not 23.8%. Because if they had
took the money and they had put it somewhere else and they
deserves the same amount of appreciation, it's taxable. It is
taxed at 43.4%. So honestly, in discussions with my customers and
In conversations with colleagues, we talk about them
negative of the impact on deferred profit and that the rate could
to be increased. But if the OZ investment is really successful
and when there is a significant appreciation. That is and should be far
outweighed by the benefits at the end of the 10 years.
Lafe Metz: You mentioned that earlier
Significance of 2026 and how that relates to the significance of it
Year 2021. And would you mind explaining that again?
Lisa Starczewski: So in the beginning when I did
talked about the three benefits, the second one I talked about was
that part of this accrued profit could never be taxed. The only
This may be the case if the investor can do so on December 31, 2026
Look back and say, OK, I held my investment for seven years
by 2026. And so 15% of my profit is never taxed. Or
I've held my investment for at least five years, and therefore
10% of my profit is never taxed. So we think about it
Law? When it's the end of 2026 and I must have thought it was
I had to come by for seven years to hit the 15% saving
End of 2019. And when it's 2026 and I'm looking for that
10% less, I have to be there by the end of 2021. So the end of 2021 is
very important because anyone who goes into a fund after 2021,
What absolutely still can be done there are still great benefits
to. You're still the 10 year benefit, but it won't
Forgive the originally deferred profit if you agree to it
the Fund after December 31, 2021, unless the date is 2026
extended.
Lafe Metz: I hope these deadlines will be met
expanded because you know it's complicated. It is a
complicated program, and it feels like it took the marketplace a
while to familiarize yourself with it. And now that it's understood
Some of the key benefits are no longer available because of it
Deadlines have expired or are approaching quickly.
Lisa Starczewski: Yes, it is absolutely
true, but it's a really good point. I mean, if not for anyone else
Reason because it took a while to get prescriptions that gave us some
Information about the actual application of the program. And we had two
Sets of proposed regulations. Then we had final regulations
We had clarifications that made material changes to these final ones
Regulations. It took a long time for practitioners, and investors
Taxpayers to get a real feel for how this would work, and
Before that, they really took risks. You know put
Money in funds, and some people did, but not the numbers that
they really hoped it would. I agree that there is a good reason for this
expand it.
Lafe Metz: Let's talk about the census a
little bit. You mentioned earlier that the 2020 census may be
affect the Opportunity Zone program in some way, and maybe you too
I can only go back a little and help us understand what 2010 is like
The census was important for this program and then for the 2020 census
Changes can lead to this.
Lisa Starczewski: Well the tracks were
reported as opportunity zones in spring 2018
Governors of every state made these designations. And there were
Parameters related to how they were created, designated areas and
whether a tract is qualified and what factors contribute to the
Decide whether a particular qualified tract has anything to do with it
whether or not this tract met the requirements of a low income
Community. Was it viewed as a low income community? But the data
that was used to determine that it was old data. It was data from the
2010 census.
And so, as you can well imagine, there were areas that had seen
significant development from 2010 to 2018 and it could still be
called Qualified Opportunity Zones, and it is
where some of the criticism of the program came from. It is
come from the fact that many of these zones if you look at them
You scratch your head and say, "How's that?
low income community? "It really is no more and
Hence, it is a very good place to park an opportunity zone
Investment because your chances of long-term appreciation are great
higher right? It's a much lower risk investment. So this is it
how relevant the 2010 census was. The designations were made. There
is a notice that lists every single tract that is qualified
Opportunity Zone, but changes have been made, major changes
to these areas. Either the boundaries have widened or the wing
has shrunk under the new data, or it has been split into more
as a treatise. And so if you look at this old list of
Tracts and you are now viewing the new census data and mapping.
The two things are not the same and there are questions too
What will happen now in relation to the areas? If it
shrunk, it means that the new boundary lines are what are
relevant? What if there is no longer a wing? What if it is no more?
meets the low-income community requirements? Tracts can be taken
from the list? What if you've already invested in it?
Tracts? How can we make existing investments grandfatherly? Just draw
Language for grandfather is so complicated because think about it
it – what does that mean for grandfather? Are you
Grandfather just the dollars that have already been brought to work?
Is it your grandfather's project that may have a future?
Cash infusions? How will this work properly? And then there is something else
The downside. Can we add tracts? If there are other areas now
If you qualify as a low-income community, the governors may add tracts
the list so we now have more Opportunity Zone areas that can
be invested in? And you know, I can tell you that the
The Ministry of Finance's priority master plan for 2020-2021 includes the
Effects of changes in the census tract on the Opportunity Zone program. And
Hence, they have made it their business to come out with guidance in relation to
this problem, but there are a number of nuances to these answers, and
I think it will take them a while to figure out what they are
want these to be answers.
Lafe Metz: At least since we were a couple
Years in the Opportunity Zone program and we've seen it all
this development and the various instances of leadership that emerge
and then extensions from COVID-19. What is the general feeling
about the program at this point? Does it feel like working? Is there
enough investment happened? Is there any good value for people to look at
in opportunity zones? What's your takeaway food?
Lisa Starczewski: You know the answer to that
So it depends who you ask, doesn't it? Because there are some people
that's absolutely thrilled with the Opportunity Zone
Program and there is a sense of disappointment that it just
didn't have the huge impact people were hoping for
would have. But you know I think this is really important
Step back and realize just a few things.
One is that we had this pandemic, and you really are
Can't even look at the last year in terms of rating
what this program can do. The second is that we saw that
highly politicized approach to OZ in March 2018 and 2019.
For this reason there was a certain reluctance. And
We just didn't have enough guidance to know what we were either
do or how to do it. I think there are reasons for that
has not had the tremendous impact it has the potential to be
to have. But I think we are seeing excitement about it again now
the OZ program across the board and much more. And I think
There are a number of reasons for this, right? I believe that the
A potential increase in capital gains makes people talk
to talk about it and about, "OK that makes it more or less
less attractive? "And I think in most cases it does more
attractive.
Another tax change I couldn't talk about is
that Biden could eliminate the same exchange that is now
limited to real estate, but if that goes away completely this is it
becomes one of the only ways to gain capital, tax and defer
becomes even more important. So we have the tax changes that are out there
drive a bit of excitement and renewed interest. We have
the fact that the program is becoming less politicized under Biden. And
I think it will be viewed as a real economy again
Cross-party development tool, and I think it is
will drive excitement. We have seen unprecedented gains in
the bull market we've had for the past few years. There is a
a lot of money on paper out there. There are enormous gains that could be
used in this program. We were in this global pandemic
for a year, which gives us considerable economic benefits
Fallout in our United States, right? If ever there was a need
for economic development instruments it is now. States, cities, towns,
They must use every tool that is available to them
Incentives for recovery and growth. All of these things I think are
work together to revitalize the OZ program, which is really leading
to my last point.
The OZ program is not a panacea on its own.
Bring help and development to low-income communities. This is
not what it is. This is not what it should ever be. It
doesn't make bad investments, doesn't make good investments. It doesn't.
But it's a tool, isn't it? It's a tool. It can be part of the
Capital stacks in a transaction. It could be one more thing
that makes the project feasible. It is the greatest and most powerful
Usage is when it is used as part of a package that is state and local
In addition to vocational training programs, governments have put together
Small business loans, streamlined regulatory processes, taxes
incremental funding. The more cooperation and collaboration that
exists between investors and funds and your local and state
Municipalities and business development authorities, the more so
likely this program will be used in such a way that
fulfills its original goals.
Lafe Metz: Well, Lisa, it was a privilege
Speak with you. I learn more about Opportunity Zones every time
have a chance to interact, and your knowledge of the statute and
Your practical experience is also evident. We are lucky
To have you here in Buchanan. Thank you again for joining us. I
I would also like to thank everyone in the audience for tuning in. We hope
They will join us for future episodes of Tax Facts and
You can do this by subscribing to the podcast on Apple, or Google
Spotify or wherever you like to listen. If you want to learn
more about Buchanan and our experience in tax law and in reality
Estate. Please visit our website at www.bipc.com and you can learn too
For more information on opportunity zones, go to www.bpic.com Opportunity Zones.
Until next time, I'm Lafe Metz and I'm here with Lisa
Starczewski. And thank you for choosing taxes
Facts.
The content of this article is intended to provide a general overview
Guide to the subject. Expert advice should be sought
about your particular circumstances.