IRS Releases Proposed Opportunity Zone Regulations – What does this mean for Investors?

On October 19, 2018, the IRS released its notice of proposed rules relating to Opportunity Zone investments.  This FAQ is designed to supplement our previous news releases on opportunity zone investments.

We have reviewed the Proposed Rules in detail for your benefit, and we believe the following are the most pertinent points for your consideration in connection with a potential Opportunity Zone investment with Lifeafar:

1.   Can I invest now or do I have to wait for the IRS to issue the final rule here?

Absolutely – you can invest now.  The Proposed Rule makes clear that the Opportunity Zone regulations here do not have to be final for taxpayers to take advantage of Opportunity Zone benefits right now so long as their investment is consistent with the Proposed Rules.

2.  Is it easy to elect to take advantage of Opportunity Zone treatment or is the paperwork overwhelming?

It’s easy.  The IRS has stated that only one two-page form (Form 8949) is required. The IRS has announced that it will provide exact instructions on how to complete that Form in connection with an Opportunity Zone investment in the near-term.  

3.  If I investment in an Opportunity Zone property that is sold before the end of the 10-year holding period, do I lose the capital gains deferral and other benefits of my investment?

No.  If an Opportunity Zone property is sold before the 10-year period expires that transaction does not automatically ruin an investor’s ability to take advantage of Opportunity Zone benefits so long as that investor appropriately reinvests in another Opportunity Zone to satisfy the holding period.

4.  I want to invest in an Opportunity Zone through my business partnership or LLC…can I?  What if my other partners do not want to?

Yes.  Partnerships and other pass-through entities like LLC’s are eligible to invest at the entity-level before funds from capital gains are distributed to members/partners, or such folks can invest their own gains into Opportunity Zones after distribution should the partnership decide not to invest collectively.

5.  I saw that Opportunity Zones will lose that formal IRS designation on December 31, 2028.  If I do not invest before December 31, 2018, how will I ever meet the required 10-year holding period to reduce and defer my capital gains?

The 10-year holding period does not have to terminate before the termination of the legislative recognition of opportunity zones on December 31, 2028.  Disposition must only occur prior to December 31, 2047. i.e., people can invest in 2019, 2020, and beyond and still meet the 10-yr period.

6.  If I invest amounts both that I received in the form of capital gains and other cash I have in my bank account, will the gains on such amounts all get the benefits of an Opportunity Zone investment?

Unfortunately, no.  Each investment is going to be treated separately.  So that means that funds invested that were not derived from a qualifying capital gain will be subject to normal tax treatment and those funds from qualifying capital gains will be able to take full advantage of the Opportunity Zone tax breaks.

7.  If I want to sell some of my capital assets (a few stocks with capital gains, for example) and invest the proceeds in an Opportunity Zone, how will I be able to determine the amount of gains I am contributing since I hold them all in one pool?

The Proposed Rules state that the amount of capital gains contributed shall be calculated using the FIFO (first-in, first-out) method of accounting.

An example here is helpful:  Assume you bought (a) one share of Amazon stock on a Monday, (b) two shares on that Tuesday and (c) five more shares on that Friday all at different market prices, and now you want to sell three of those eight shares and contribute the gains therefrom to an Opportunity Zone.  In this case, the amount of capital gains you contribute would be equal to: the aggregate Total Sale Price of the Shares – the aggregate cost to you of the share you bought on Monday and two of the shares you bought on Tuesday.

IRS DISCLOSURE

TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE IRS, WE INFORM YOU THAT ANY TAX ADVICE CONTAINED IN THIS RELEASE WAS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING TAX-RELATED PENALTIES UNDER THE U.S. INTERNAL REVENUE CODE OF 1986, AS AMENDED. TAX ADVICE CONTAINED IN THIS RELEASE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTION(S) OR MATTER(S) ADDRESSED BY THIS RELEASE. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

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