Recent Developments Observations: Qualified Opportunity Zones: The Good, the Better and the Not So Bad

The tax benefits offered by an investment in a QOF are threefold: (1) investors can defer recognized capital gains from other sources until the earlier of (a) the disposition of the QOF interest or (b) December 31, 2026, so long as such gains are invested within a 180-day investment period and the t...

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Veröffentlicht in:Journal of Passthrough Entities 2019-11, Vol.22 (6), p.37-74
Hauptverfasser: Cohen, Adam M, Haradon, Sarah Ritchey
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description The tax benefits offered by an investment in a QOF are threefold: (1) investors can defer recognized capital gains from other sources until the earlier of (a) the disposition of the QOF interest or (b) December 31, 2026, so long as such gains are invested within a 180-day investment period and the taxpayer makes a gain-deferral election; (2) investors that hold their QOF investment for five and seven years receive a tax basis step-up equal to 10 percent of the deferred gain and an additional five percent of the deferred gain, respectively; and (3) investors who maintain their investment in the QOF for at least 10 years (the "10-Year Period") receive a basis step-up to the fair market value of the investment on the sale or exchange date.2 On October 19, 2018, Treasury and the IRS issued the first set of Proposed Regulations and other guidance regarding O-Zones (the "October Proposed Regulations").3 The October Proposed Regulations were amended and expanded by the April Proposed Regulations. "13 Whether a lease is market rate is determined under the Treasury Regulations for Code Sec. 482 and includes consideration of whether the terms of the lease "reflect common, armslength market practice" in the location that includes the O-Zone.14 While purchased tangible property must be acquired from an unrelated person, the April Proposed Regulations allow leased tangible property to be acquired from a related party to the QOF or the O-Zone Business, suujecc to certain requirements.15 First, if che lessor and lessee are related, the QOF or the O-Zone Business cannot prepay its lease payments beyond 12 months in advance.16 Additionally, if the lessor and lessee are related and the lease relates to personal property, then either (1) the property must have its "original use" in an O-Zone begin with the QOF or O-Zone Business (as explained below) or (2) the QOF or O-Zone Business must become the owner of tangible personal property that has a value not less than the value of the leased personal property.17 If the lessee is required to purchase tangible property, the acquisition of such property must occur during the period that begins on the date the lessee receives possession of the leased property and ends on the earlier of either (1) the day that is 30 months later or (2) the last day of the lease.18 Moreover, there must be substantial overlap of zones in which the QOF or O-Zone Business uses the acquired property and leased property.19 For purposes of leased property,
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"13 Whether a lease is market rate is determined under the Treasury Regulations for Code Sec. 482 and includes consideration of whether the terms of the lease "reflect common, armslength market practice" in the location that includes the O-Zone.14 While purchased tangible property must be acquired from an unrelated person, the April Proposed Regulations allow leased tangible property to be acquired from a related party to the QOF or the O-Zone Business, suujecc to certain requirements.15 First, if che lessor and lessee are related, the QOF or the O-Zone Business cannot prepay its lease payments beyond 12 months in advance.16 Additionally, if the lessor and lessee are related and the lease relates to personal property, then either (1) the property must have its "original use" in an O-Zone begin with the QOF or O-Zone Business (as explained below) or (2) the QOF or O-Zone Business must become the owner of tangible personal property that has a value not less than the value of the leased personal property.17 If the lessee is required to purchase tangible property, the acquisition of such property must occur during the period that begins on the date the lessee receives possession of the leased property and ends on the earlier of either (1) the day that is 30 months later or (2) the last day of the lease.18 Moreover, there must be substantial overlap of zones in which the QOF or O-Zone Business uses the acquired property and leased property.19 For purposes of leased property, the "original use" of the property occurs when the property is first used in the O-Zone in a manner that would allow depreciation and amortization if the lessee owned the property.20 If property has been unused or vacant for an uninterrupted period of at least five years, original use begins when any person first uses or places the property in service in the O-Zone.21 The April Proposed Regulations also include an antiabuse rule with respect to leased tangible property. In the case of leased real property by a QOF, the property is not treated as O-Zone Business Property if, at the time the lease is entered into, there is a plan, intent, or expectation for the real property to be purchased by the QOF for an amount of consideration other than the fair market value of the property determined at the time of purchase.22 Lease Valuation Having established what leased property can be O-Zone Business Property, the April Proposed Regulations provide a mechanism for valuing leased tangible property to determine whether a QOF meets the 90-percent test and an O-Zone Business meets the substantially all requirement for O-Zone Business Property. 1.475(a)-4(h) that is prepared in accordance with U.S. generally acceptable accounting principles and recognizes the lease as tangible property.25 Under this method, the value of leased tangible property of a QOF or O-Zone Business is the value of such property as reported on the applicable financial statement for the relevant reporting period.26 Under the Alternative Valuation Method, the value of the leased property is determined by calculating the present value of the leased property, which requires the determination of the present values of all payments to be made under the lease for the property using the applicable federal discount rate under Code Sec. 1274(d)(1).27 If a QOF or an O-Zone Business uses the Alternative Valuation Method, the calculation must be made at the time the lease is entered into, and</description><identifier>ISSN: 1099-7407</identifier><language>eng</language><publisher>Riverwoods: CCH, Inc</publisher><subject>Enterprise zones ; Fair market value ; Financial statements ; Investments ; Laws, regulations and rules ; Lessees ; Medical care quality ; Opportunity zones ; Personal property ; Retirement benefits ; State court decisions ; Tax Cuts &amp; Jobs Act 2017-US ; Taxation ; Taxpayers ; Valuation methods</subject><ispartof>Journal of Passthrough Entities, 2019-11, Vol.22 (6), p.37-74</ispartof><rights>COPYRIGHT 2019 CCH, Inc.</rights><rights>Copyright CCH INCORPORATED Nov/Dec 2019</rights><woscitedreferencessubscribed>false</woscitedreferencessubscribed></display><links><openurl>$$Topenurl_article</openurl><openurlfulltext>$$Topenurlfull_article</openurlfulltext><thumbnail>$$Tsyndetics_thumb_exl</thumbnail><link.rule.ids>312,314,780,784,791</link.rule.ids></links><search><creatorcontrib>Cohen, Adam M</creatorcontrib><creatorcontrib>Haradon, Sarah Ritchey</creatorcontrib><title>Recent Developments Observations: Qualified Opportunity Zones: The Good, the Better and the Not So Bad</title><title>Journal of Passthrough Entities</title><description>The tax benefits offered by an investment in a QOF are threefold: (1) investors can defer recognized capital gains from other sources until the earlier of (a) the disposition of the QOF interest or (b) December 31, 2026, so long as such gains are invested within a 180-day investment period and the taxpayer makes a gain-deferral election; (2) investors that hold their QOF investment for five and seven years receive a tax basis step-up equal to 10 percent of the deferred gain and an additional five percent of the deferred gain, respectively; and (3) investors who maintain their investment in the QOF for at least 10 years (the "10-Year Period") receive a basis step-up to the fair market value of the investment on the sale or exchange date.2 On October 19, 2018, Treasury and the IRS issued the first set of Proposed Regulations and other guidance regarding O-Zones (the "October Proposed Regulations").3 The October Proposed Regulations were amended and expanded by the April Proposed Regulations. "13 Whether a lease is market rate is determined under the Treasury Regulations for Code Sec. 482 and includes consideration of whether the terms of the lease "reflect common, armslength market practice" in the location that includes the O-Zone.14 While purchased tangible property must be acquired from an unrelated person, the April Proposed Regulations allow leased tangible property to be acquired from a related party to the QOF or the O-Zone Business, suujecc to certain requirements.15 First, if che lessor and lessee are related, the QOF or the O-Zone Business cannot prepay its lease payments beyond 12 months in advance.16 Additionally, if the lessor and lessee are related and the lease relates to personal property, then either (1) the property must have its "original use" in an O-Zone begin with the QOF or O-Zone Business (as explained below) or (2) the QOF or O-Zone Business must become the owner of tangible personal property that has a value not less than the value of the leased personal property.17 If the lessee is required to purchase tangible property, the acquisition of such property must occur during the period that begins on the date the lessee receives possession of the leased property and ends on the earlier of either (1) the day that is 30 months later or (2) the last day of the lease.18 Moreover, there must be substantial overlap of zones in which the QOF or O-Zone Business uses the acquired property and leased property.19 For purposes of leased property, the "original use" of the property occurs when the property is first used in the O-Zone in a manner that would allow depreciation and amortization if the lessee owned the property.20 If property has been unused or vacant for an uninterrupted period of at least five years, original use begins when any person first uses or places the property in service in the O-Zone.21 The April Proposed Regulations also include an antiabuse rule with respect to leased tangible property. In the case of leased real property by a QOF, the property is not treated as O-Zone Business Property if, at the time the lease is entered into, there is a plan, intent, or expectation for the real property to be purchased by the QOF for an amount of consideration other than the fair market value of the property determined at the time of purchase.22 Lease Valuation Having established what leased property can be O-Zone Business Property, the April Proposed Regulations provide a mechanism for valuing leased tangible property to determine whether a QOF meets the 90-percent test and an O-Zone Business meets the substantially all requirement for O-Zone Business Property. 1.475(a)-4(h) that is prepared in accordance with U.S. generally acceptable accounting principles and recognizes the lease as tangible property.25 Under this method, the value of leased tangible property of a QOF or O-Zone Business is the value of such property as reported on the applicable financial statement for the relevant reporting period.26 Under the Alternative Valuation Method, the value of the leased property is determined by calculating the present value of the leased property, which requires the determination of the present values of all payments to be made under the lease for the property using the applicable federal discount rate under Code Sec. 1274(d)(1).27 If a QOF or an O-Zone Business uses the Alternative Valuation Method, the calculation must be made at the time the lease is entered into, and</description><subject>Enterprise zones</subject><subject>Fair market value</subject><subject>Financial statements</subject><subject>Investments</subject><subject>Laws, regulations and rules</subject><subject>Lessees</subject><subject>Medical care quality</subject><subject>Opportunity zones</subject><subject>Personal property</subject><subject>Retirement benefits</subject><subject>State court decisions</subject><subject>Tax Cuts &amp; 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(2) investors that hold their QOF investment for five and seven years receive a tax basis step-up equal to 10 percent of the deferred gain and an additional five percent of the deferred gain, respectively; and (3) investors who maintain their investment in the QOF for at least 10 years (the "10-Year Period") receive a basis step-up to the fair market value of the investment on the sale or exchange date.2 On October 19, 2018, Treasury and the IRS issued the first set of Proposed Regulations and other guidance regarding O-Zones (the "October Proposed Regulations").3 The October Proposed Regulations were amended and expanded by the April Proposed Regulations. "13 Whether a lease is market rate is determined under the Treasury Regulations for Code Sec. 482 and includes consideration of whether the terms of the lease "reflect common, armslength market practice" in the location that includes the O-Zone.14 While purchased tangible property must be acquired from an unrelated person, the April Proposed Regulations allow leased tangible property to be acquired from a related party to the QOF or the O-Zone Business, suujecc to certain requirements.15 First, if che lessor and lessee are related, the QOF or the O-Zone Business cannot prepay its lease payments beyond 12 months in advance.16 Additionally, if the lessor and lessee are related and the lease relates to personal property, then either (1) the property must have its "original use" in an O-Zone begin with the QOF or O-Zone Business (as explained below) or (2) the QOF or O-Zone Business must become the owner of tangible personal property that has a value not less than the value of the leased personal property.17 If the lessee is required to purchase tangible property, the acquisition of such property must occur during the period that begins on the date the lessee receives possession of the leased property and ends on the earlier of either (1) the day that is 30 months later or (2) the last day of the lease.18 Moreover, there must be substantial overlap of zones in which the QOF or O-Zone Business uses the acquired property and leased property.19 For purposes of leased property, the "original use" of the property occurs when the property is first used in the O-Zone in a manner that would allow depreciation and amortization if the lessee owned the property.20 If property has been unused or vacant for an uninterrupted period of at least five years, original use begins when any person first uses or places the property in service in the O-Zone.21 The April Proposed Regulations also include an antiabuse rule with respect to leased tangible property. In the case of leased real property by a QOF, the property is not treated as O-Zone Business Property if, at the time the lease is entered into, there is a plan, intent, or expectation for the real property to be purchased by the QOF for an amount of consideration other than the fair market value of the property determined at the time of purchase.22 Lease Valuation Having established what leased property can be O-Zone Business Property, the April Proposed Regulations provide a mechanism for valuing leased tangible property to determine whether a QOF meets the 90-percent test and an O-Zone Business meets the substantially all requirement for O-Zone Business Property. 1.475(a)-4(h) that is prepared in accordance with U.S. generally acceptable accounting principles and recognizes the lease as tangible property.25 Under this method, the value of leased tangible property of a QOF or O-Zone Business is the value of such property as reported on the applicable financial statement for the relevant reporting period.26 Under the Alternative Valuation Method, the value of the leased property is determined by calculating the present value of the leased property, which requires the determination of the present values of all payments to be made under the lease for the property using the applicable federal discount rate under Code Sec. 1274(d)(1).27 If a QOF or an O-Zone Business uses the Alternative Valuation Method, the calculation must be made at the time the lease is entered into, and</abstract><cop>Riverwoods</cop><pub>CCH, Inc</pub><tpages>38</tpages></addata></record>
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source HeinOnline Law Journal Library; EBSCOhost Business Source Complete
subjects Enterprise zones
Fair market value
Financial statements
Investments
Laws, regulations and rules
Lessees
Medical care quality
Opportunity zones
Personal property
Retirement benefits
State court decisions
Tax Cuts & Jobs Act 2017-US
Taxation
Taxpayers
Valuation methods
title Recent Developments Observations: Qualified Opportunity Zones: The Good, the Better and the Not So Bad
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