August 21, 2018

August 21, 2018

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August 20, 2018

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IRS Announces First Wave of Opportunity Zone Designations

The IRS inaugurated an exciting new community redevelopment program on April 9 and April 18 when it designated more than 4,800 Qualified Opportunity Zones (QOZs) in 20 states, three possessions, and Puerto Rico1. (See our e-alerts describing what tax incentives are available for investments in QOZs and how opportunity zones are nominated, certified, and designated).

Background

QOZs are economically distressed communities where taxpayers can invest on a preferential tax basis. The tax incentives allow a taxpayer, under certain circumstances, to defer tax on gain from the sale of appreciated property to an unrelated person if the gain is reinvested within 180 days of the sale in a certified investment vehicle known as a Qualified Opportunity Fund (QOF). Tax benefits available to investors under this program also include eliminating the tax on appreciation of QOF investments if the taxpayer holds its interest in the QOF for at least 10 years.

Other states and U.S. possessions had to submit nominations for zones by April 20, 2018. The IRS is expected to respond quickly to those nominations.

How States Allocated QOZs

The opening rounds of opportunity zone designations included some surprises. Unlike similar capital gain relief programs for empowerment zones and enterprise and renewal communities, the QOZ program expressly authorizes states to nominate up to 5 percent of their QOZs from tracts that are contiguous with "low-income communities" (LICs) but do not meet any of the low-income thresholds set forth under the rules for New Markets Tax Credits (generally, census tracts with a poverty rate at least 20 percent above the national average or a median family income not in excess of 80 percent of the applicable statewide or metropolitan area median). California, in particular, appears to have taken advantage of this opportunity by nominating a pair of Los Angeles-area census tracts that have annual median family incomes of $92,000 and $108,000, respectively.


1. As of the date of this alert, Treasury has certified and designated QOZs in the following states and possessions: Alabama, Arizona, California, Colorado, Delaware, Georgia, Idaho, Kentucky, Michigan, Mississippi, Missouri, Nebraska, New Jersey, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Vermont, Wisconsin, Puerto Rico, American Samoa, the Northern Mariana Islands, and the U.S. Virgin Islands.

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About this Author

Wendi Kotzen, Ballard Spahr Law Firm, Philadelphia, Tax Law Attorney
Partner

Wendi L. Kotzen is the Co-Practice Leader of Ballard Spahr's Tax Group. She advises clients on the taxation of all types of real estate transactions, has an extensive background in Pennsylvania and Philadelphia realty transfer tax planning, and advises clients on mergers and acquisitions. Ms. Kotzen is also experienced working with REITs; real estate partnerships (both for developers and investors); leasing transactions, including sale-leasebacks; Pennsylvania state tax incentives; and structuring like-kind exchanges (forward, reverse, and TIC exchanges).

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Linda Schakel, Ballard Spahr Law Firm, Washington DC, Tax Law Attorney
Partner

Linda B. Schakel served as an attorney adviser in the Office of Tax Policy of the U.S. Treasury (May 1995 to August 1997) after practicing with Ballard Spahr for nine years. At the Treasury Department, she had primary responsibility for tax legislative and regulatory projects in the areas of tax-exempt bonds, Low Income Housing Tax Credits, empowerment zones and enterprise communities, work-opportunity tax credits, and welfare-to-work tax credits. Ms. Schakel returned to Ballard Spahr after her work with the Treasury Department. Before law school, she taught gifted elementary-school students and teachers of gifted students at the University of South Florida and several universities in the Washington, D.C., area.

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Adam Wallwork, Ballard Spahr Law Firm, Washington DC, Finance Law Attorney
Associate

Adam S. Wallwork is in the firm's Public Finance Department where he has acted as bond counsel, underwriter's counsel, borrower's counsel, trustee's counsel, and counsel to banks providing credit enhancements for museums, universities, long-term care providers, and affordable housing developers across the country. His practice focuses on the range of federal, state, and local tax issues that arise for investors, sponsors, underwriters, and issuers in securitized and structured finance transactions.

202-661-7668