"Because many residential and retail construction projects require a longer time frame, developers worried that they would be penalized if they accumulated cash while starting their investments.
The Treasury‘s proposed rules give businesses an additional 30 months to hold that working capital, as long as they have a plan for a qualifying project in a zone, the Treasury officials said. Those plans don’t have to be filed with the government but must be available for an Internal Revenue Service audit, the officials said."
The bold part is critical for real estate development projects. Otherwise, without that distinction, a lot of developers would not be able to meet the 90% asset test when it is tested every six (6) months.
Huge question answered right here basically the 10 years step up basis is available up until June 2027. The 10/15% reduction is the only thing that is ticking Jan 2019
Section 1400Z-2 does not contain specific statutory language like that in some
other provisions, such as the D.C. enterprise zones provision in section 1400B(b)(5),
that expressly permits a taxpayer to satisfy the requisite holding period after the
termination of the designation of a zone. Commenters have raised the question
described in the preceding paragraph—whether a taxpayer whose investment in a QOF
has its 10-year anniversary after the 2028 calendar year will be able to take advantage
of the basis step-up election provided in section 1400Z-2(c). The incentive provided by
this benefit is integral to the primary purpose of the provision (see H.R. Rept. 115-466,
537, which describes the intent to attract an influx of capital to designated low income
communities). For this reason, the proposed regulations permit taxpayers to make the
basis step-up election under section 1400Z-2(c) after a qualified opportunity zone
designation expires.
18
The ability to make this election is preserved under these proposed regulations
until December 31, 2047, 20½ years after the latest date that an eligible taxpayer may
properly make an investment that is part of an election to defer gain under section
1400Z-2(a). Because the latest gain subject to deferral would be at the end of 2026, the
last day of the 180-day period for that gain would be in late June 2027. A taxpayer
deferring such a gain would achieve a 10-year holding period in a QOF investment only
in late June 2037. Thus, this proposed rule would permit an investor in a QOF that
makes an investment as late as the end of June 2027 to hold the investment in the QOF
for the entire 10-year holding period described in section 1400Z-2(c), plus another 10
years.
The additional ten year
Has anyone built an OZ post tax IRR model? I'm building one for my fund as we explore and am thinking the only way to do this is to use a 3 statement model (the deals are all MF), but wondering if others have done them? I'm thinking the only way to track the tax savings is in a seperate IRR table since tax savings are nowhere to be tracked on the BS?
you're also depreciating your maintenance capex too right the reserves in your cash flows, since those are long-term expense items? This is how I do it in 3 statement models so thought it's easier, but just wondering what others are doing.
Yeah you guys right just added the dep and int expense to the NOI, added back reserves since that's an above the line treatment.
Question, do you get any benefit from investing in an OZ, like doing a development in an OZ without using your capital gains? The income produced during the holding period doesn't have any deferred benefit in the OZ correct, that is taxed as normal income tax at the equity tax rate?
Also what is your tax basis for the LP who is absorbing majority of the pre-tax expenses, my understanding is the LP is guaranteeying the debt their basis is the full value of the debt and not just their invested equity?
Question, do you get any benefit from investing in an OZ, like doing a development in an OZ without using your capital gains?
No.
zacksc11:
The income produced during the holding period doesn't have any deferred benefit in the OZ correct, that is taxed as normal income tax at the equity tax rate?
Correct. Ordinary income is taxed as ordinary income. No benefit.
zacksc11:
Also what is your tax basis for the LP who is absorbing majority of the pre-tax expenses, my understanding is the LP is guaranteeing the debt their basis is the full value of the debt and not just their invested equity?
The investor's basis in the Opportunity Zone Investment is $0. Therefore, depreciation could only be applied to the basis that is generated by way on ordinary income. However, my understanding is that the unused losses accrue and are released at time of sale due to passive actively loss rules.
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Is this a more rehearsed version? Any Major changes? I see that it has more rules on how the 90% is measured.
From the article
"Because many residential and retail construction projects require a longer time frame, developers worried that they would be penalized if they accumulated cash while starting their investments.
The Treasury‘s proposed rules give businesses an additional 30 months to hold that working capital, as long as they have a plan for a qualifying project in a zone, the Treasury officials said. Those plans don’t have to be filed with the government but must be available for an Internal Revenue Service audit, the officials said."
The bold part is critical for real estate development projects. Otherwise, without that distinction, a lot of developers would not be able to meet the 90% asset test when it is tested every six (6) months.
Found it in the IRS docs looks like it is actually 31 months.
Really nice if you can only unload big portions of a Cap Gain such as RE
Huge question answered right here basically the 10 years step up basis is available up until June 2027. The 10/15% reduction is the only thing that is ticking Jan 2019
Section 1400Z-2 does not contain specific statutory language like that in some other provisions, such as the D.C. enterprise zones provision in section 1400B(b)(5), that expressly permits a taxpayer to satisfy the requisite holding period after the termination of the designation of a zone. Commenters have raised the question described in the preceding paragraph—whether a taxpayer whose investment in a QOF has its 10-year anniversary after the 2028 calendar year will be able to take advantage of the basis step-up election provided in section 1400Z-2(c). The incentive provided by this benefit is integral to the primary purpose of the provision (see H.R. Rept. 115-466, 537, which describes the intent to attract an influx of capital to designated low income communities). For this reason, the proposed regulations permit taxpayers to make the basis step-up election under section 1400Z-2(c) after a qualified opportunity zone designation expires. 18 The ability to make this election is preserved under these proposed regulations until December 31, 2047, 20½ years after the latest date that an eligible taxpayer may properly make an investment that is part of an election to defer gain under section 1400Z-2(a). Because the latest gain subject to deferral would be at the end of 2026, the last day of the 180-day period for that gain would be in late June 2027. A taxpayer deferring such a gain would achieve a 10-year holding period in a QOF investment only in late June 2037. Thus, this proposed rule would permit an investor in a QOF that makes an investment as late as the end of June 2027 to hold the investment in the QOF for the entire 10-year holding period described in section 1400Z-2(c), plus another 10 years. The additional ten year
Has anyone built an OZ post tax IRR model? I'm building one for my fund as we explore and am thinking the only way to do this is to use a 3 statement model (the deals are all MF), but wondering if others have done them? I'm thinking the only way to track the tax savings is in a seperate IRR table since tax savings are nowhere to be tracked on the BS?
I have done many. I'm not sure what the value is in creating a 3-Statement model to track this.
Just take your normal model and add on tax assumptions to your levered cash flow.
Yeah pretty simple just add tax savings to cash flow.
you're also depreciating your maintenance capex too right the reserves in your cash flows, since those are long-term expense items? This is how I do it in 3 statement models so thought it's easier, but just wondering what others are doing.
Not sure what you're describing. Need more detail to confirm if we do this too.
Yeah you guys right just added the dep and int expense to the NOI, added back reserves since that's an above the line treatment.
Question, do you get any benefit from investing in an OZ, like doing a development in an OZ without using your capital gains? The income produced during the holding period doesn't have any deferred benefit in the OZ correct, that is taxed as normal income tax at the equity tax rate?
Also what is your tax basis for the LP who is absorbing majority of the pre-tax expenses, my understanding is the LP is guaranteeying the debt their basis is the full value of the debt and not just their invested equity?
Correct. Ordinary income is taxed as ordinary income. No benefit.
The investor's basis in the Opportunity Zone Investment is $0. Therefore, depreciation could only be applied to the basis that is generated by way on ordinary income. However, my understanding is that the unused losses accrue and are released at time of sale due to passive actively loss rules.What if you already own something in a zone? Would there be no way to hit the improvement requirement because you don't have a 2019 basis?
Dolorum sequi neque impedit est aspernatur dolor et. Ab omnis nobis tempore explicabo est repellat aut illo. Quae earum dolore mollitia asperiores. Debitis ut molestias rerum officia excepturi dicta totam. Labore maiores ut sit necessitatibus repudiandae. Eum sapiente odio iusto asperiores id.
Aut accusamus quis iusto itaque accusantium provident voluptatum. Voluptas facere dolor officiis adipisci. Ipsam molestias qui deleniti rerum provident atque voluptas. Labore ab vero numquam. Ullam a doloremque et autem.
Velit cupiditate fuga quia nam molestiae. Tempore quibusdam expedita omnis.
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