kick in for QOF investments held at least 5, 7 or 10 years
for the following reasons:
1. For those held at least 5 years, ending by December
31, 2026, the taxable capital gain amount through step-
up in basis shall be reduced 10 percent.
2. For those held at least 7 years, ending by December
31, 2026, the taxable capital gain amount through step-
up in basis shall be reduced 15 percent.
3. If held for 10 or more years, ALL capital gains federal
taxes on the appreciation of a QOF investment shall be
ELIMINATED.
QUALIFIED OPPORTUNITY ZONE PROPERTY
(“QOZP”)
The QOZ Program is meant to stimulate new development
in designated areas, not just enable the transfer of existing
cash flow. Therefore, QOFs are expected to invest in new
development and are not able to realize tax benefits from
simply purchasing a property in an opportunity zone. In order
to qualify as a QOZ Program (QOZP), a property or project
must pass one of the following two tests:
1. Substantial Improvement – Requires improvements
equal to the QOF’s initial investment to an existing
property over a 30-month period (i.e. if a QOF buys a
property for $1 million it must “substantially improve”
that property by at least $1 million within 30 months from
purchase).
2. Original Use – For new development projects being
placed into service in a QOZ.
The majority of new multifamily QOZ investment has been
in the form of new developments satisfying the “Original
Use” requirement. Typically, a QOF will act as a developer to
organize, oversee and finance a new apartment project, and
the property becomes depreciable the day it is put into service.
An increasingly popular alternative method that QOFs are
taking advantage of nationwide is to purchase a QOZP project
prior to the date that property is put into service. This can
mean purchasing a mostly or partially completed construction
project or purchasing a completed multifamily project prior to
the property obtaining a temporary certificate of occupancy.
This method allows a QOF buyer to purchase an existing
(or soon to be existing, under the IRS and local government
sanctions) property, however, this carries the inherent risk
of buying a property pre-stabilization and makes the buyer
responsible for completing the certificate of occupancy process
and 100 percent of the initial lease-up.
ENTER THE ZONE
Ultimately, an investor needs capital gains, correct IRS
filing and transaction timing, proper QOF entity formation
and a long-term investment plan in order to invest in an
Opportunity Zone. Looking beyond an investor’s personal
financial goals, the QOZ Program’s impact on targeted lower-
income areas should confidently be immense and long-lasting.
It will be extremely interesting to see how new development
grows as the program matures.
www.aamdhq.org
MAY 2020
TRENDS | 25