16B — May 24 - June 13, 2019 — Owners, Developers & Managers — M id A tlantic
Real Estate Journal
O wners , D evelopers & M anagers
DESCCO Design & Construction serves as the general project contractor Hamburg, PA fire crews begin demo for new fire house
QOF will initially have zero basis in the fund without con- sideration of debt basis. If debt basis didn’t count towards an investor’s QOF basis, then presumably any distribution would trigger a partial inclu- sion of deferred gain. Luckily, the IRS will follow the tax ba- sis rules under Subchapter K of the Internal Revenue Code. However, distributions from a corporate QOF that are not considered a dividend (from earnings and profits) will be treated as an inclusion event taxable to the stockholders. Sale of QualifiedOpportunity Zone Property Inside a QOF Won’t Impact a Partner’s/Shareholder’s Holding Period Under the new proposed regulations, QOFs are now more attractive than ever for private equity funds. The sale of qualified partnership inter- est, qualified corporate stock, or qualified opportunity zone business property by a QOF will not impact the holding period for investors. For example, a taxpayer’s interest in a QOF will qualify for the exclusion of gain under the 10- year holding period even if the QOF buys, sells, and exchanges qualified op- portunity zone property within those 10 years. Investors Have Several Options When it Comes to Disposing of and Reinvesting QOF Property Although a sale of QOZ property within a QOF won’t nounced that the Hamburg fire crews began demo for new fire house. The $1.3 million Hamburg fire station addition and renovation project replac- es the original 1886 building, which was built as the borough hall on the second floor and the fire station on the first floor. Members of Union Fire Co. No. 1 of Hamburg stand in front of the wall that was ceremonially broken to start the demolition. Hamburg fire crews used sledge hammers to ceremoni- ally begin demolition of the old fire house to make room for a new station house on April 26. “It’s been a long time com- ing,” said Kevin Hartman, fire chief for Union Fire Co. No. 1 AMBURG, PA — DESCCO Design & Construct io n an- H
from simply purchasing land and holding onto the property for 10 years. Unfinished Development Projects and Abandoned Buildings Qualify as Original-Use Property With the initial round of regulations, the IRS proposed an “original-use” test to pre- vent investors from buying and holding property without making substantial invest- ments into these economically distressed communities. Under these rules, real estate inves- tors would have to double their investment bymaking improve- ments in excess of the original purchase price of the property without regard to land. For example, if a real estate investor purchases an existing building located in an oppor- tunity zone for $600,000 (of which $100,000 is allocable to land), the investor is required to invest more than $500,000 to substantially improve the property. Under the second round of regulations, the IRS clari- fies the “original-use” rule as property that has not been de- preciated by another taxpayer other than the QOF within the opportunity zone. Therefore, a development project that is never completed or put into service may qualify as original-use property. For example, assume the same facts as the example above, but the property is never put into service by the original seller. Since the property was never depreciated by another “This will aid the commu- nity in providing an updated building for the current op- erational ability of the depart- ment to respond to modern day emergencies, and to sup- port community efforts due to the rapid growth of Northern Berks County and the Ham- burg area,” said Emes. “Our goal is to build the volunteer ranks and to improve a faster response time for emergencies for our community.” the first floor. “There’s a lot of history that sits behind these walls that dates back to 1832. We still have a horse drawn wagon, the steamer that’s out back,” said Jarrod Emes, Deputy Chief. “A lot of folks and a lot of history have walked through the doors over the years.”
taxpayer, the QOF is not sub- ject to the substantial improve- ment requirement. What about property that is put into service but subse- quently abandoned? Can a QOF side-step the substantial improvement requirement by purchasing abandoned prop- erty? Under the new proposed regulations, the IRS allows QOFs to meet the original-use test and circumvent the sub- stantial requirement test only if the property is abandoned for 5 or more years. There Are Still More Rules to Come Although the second round of regulations has made investing in a QOFmore attractive, there are still several unknowns and complexities surrounding the law. Another public hearing is scheduled for July 9, 2019, but investors will need to act quickly to cash in on all of the tax incentives. Investors only have until December 31, 2019 to defer a capital gain and re- invest the proceeds into a QOF to benefit from the total 15% exclusion. The tax incentives within Sec. 1400Z-2 are lucrative and similar incentives come along infrequently. To get the most out the new law, it’s impor- tant to partner with trusted professionals within the QOZ space to avoid any headaches or unintended consequences over the decade to come. Jeremias Ramos, CPA is a senior accountant at WithumSmith+Brown, PC (Withum). The fire company has about 35 active members. The state-of-the-art facility features safety measures that are very important in regard to gear cleaning, fire fighter safety and maintenance and health initiatives. Project partners are Tomp- kins VIST Bank as lender, Timothy Cox of Meister- Cox as the architect and DESCCO Design & Construc- tion of Fleetwood as the gen- eral project contractor. Tim Heffner , vice presi- dent and sr. project manager of DESCCO, said design work began about two years ago. The fire company approved the project in October. The project is estimated to be completed by the end of No- vember or December 2019.
Rendering of the completed addition and renovation project for Union Fire Co. No. 1 of Hamburg.
impact an investor’s holding period, the QOF itself is still required to meet the 90% test. In the latest proposed regulations, the IRS gives ad- ditional leeway to investors by allowing QOFs as long as 12 months to reinvest the proceeds from the disposition of QOZ property as long as the proceeds are held as cash, cash equivalents, or debt in- struments with a term of 18 months or less. As for the recognition of any capital gain, if the investor has not held the QOF interest for 10 years, then any realized gain will be taxed at the corpo- rate level or passed through to the partners in the QOF. One of the most interesting revelations to come out of the newest proposed regulations is the option to either exclude the gain from the sale of the QOF interest after the 10- year holding period or exclude gains from property sold that was held by the QOF after the 10-year holding period. For example, say an inves- tor holds qualified interest in a QOF that is taxed as a part- nership for federal income tax purposes. After 10 years, the partner sells his or her part- nership interest and elects to adjust the basis to the fair market value on the date of disposition (realizing no gain on the sale of the partnership interest). The basis of the QOF partnership assets are also ad- justed and such adjustment is calculated in a manner similar to a section 743(b) adjustment. The fire company first start- ed considering an addition in the mid-1980s which did not come to fruition until their current project. The design process with DESCCO began two years ago. of Hamburg, located on 4th St.. “We need it. The trucks don’t fit in the station anymore. It’s really a blessing.”
Assume a similar circum- stance as described above but the partner wishes to remain in the QOF. If the QOF were to sell qualified opportunity zone business property and flow the income to the part- ners, then the partners with the 10-year holding period within the QOF may elect to exclude the allocable gains from their taxable income. This election is advantageous to larger funds that can gradu- ally sell off QOZ property without impacting the real underlying economic value of these investments. This would presumably alleviate the issue of forcing partners to sell all of their partnership interest at once to benefit from the exclu- sion of taxable gain. Anti-Abuse Rules Added to Prevent Speculative Land Purchases Many investors looking to cash in on these opportunity zone tax incentives without putting substantial capital at risk contemplated speculative land purchases. This type of economic decision-making was contrary to the initial purpose and intent of the leg- islation, so the IRS proposed additional anti-abuse rules in regard to land purchases. Under the new proposed regulations, land can be treat- ed as qualified opportunity zone business property for purposes of section 1400Z-2 only if it is used in a trade or business of a QOF or qualified opportunity zone business. This will prevent investors The $1.3 million addition and renovation project re- places the original 1886 build- ing, which was built as the borough hall on the second floor and the fire station on The sledge hammer cer- emony officially begins the demolition of the old fire sta- tion building and an adjacent brick building.
Top 5 takeaways: Second round of QOZ proposed regulations for . . . continued from page 2B
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