Opportunity Zone Tax Compliance

What does Opportunity Zone tax compliance encompass?

Opportunity Zone tax compliance in Florida involves adhering to state and federal tax laws and regulations. The Opportunity Zone program offers tax incentives for investments in economically distressed areas. Investors receive tax benefits, including deferral of capital gains taxes and potential exclusion of gains from the sale of qualified investments.

For example, an investor in a Florida Opportunity Zone must ensure their investment is through a Qualified Opportunity Fund (QOF). This fund must organize as a corporation or partnership to invest in qualified Opportunity Zone property. Moreover, at least 90% of the QOF’s assets must invest in Opportunity Zone property. Failure to meet these requirements may result in penalties and loss of tax benefits.

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Which laws and regulations apply to Opportunity Zone tax compliance in Florida?

State and federal laws and regulations govern Florida’s Opportunity Zone tax compliance. The primary federal law is the Tax Cuts and Jobs Act of 2017, which established the Opportunity Zone program under IRC Section 1400Z-1 and 1400Z-2. Additionally, the U.S. Department of the Treasury has issued regulations guiding the program’s implementation, such as 26 CFR § 1.1400Z2.

In Florida, the Opportunity Zone program is not explicitly subject to further regulation by state statutes. However, Florida investors must adhere to general state tax laws, including the Florida Statutes Chapter 220 for corporate income tax and Chapter 199 for intangible personal property tax. These state tax laws interact with federal Opportunity Zone rules to determine the overall tax implications of an investment. Therefore, compliance with federal and state tax laws is crucial to ensure investors receive the intended tax benefits and avoid penalties.

What are the strategic benefits of Opportunity Zone tax compliance?

Investors may benefit from the following:

• Deferral of capital gains taxes: By investing in a Qualified Opportunity Fund (QOF) within 180 days of realizing a capital gain, investors can defer federal capital gains taxes until the earlier of the sale of the QOF investment or December 31, 2026. This provision allows investors to keep more of their capital working for them and potentially increase their overall return on investment.
• Reduction of capital gains taxes: If an investor holds their investment in a QOF for at least five years, they receive a 10% step-up in basis, reducing their capital gains tax liability when they sell their investment. After holding the investment for at least seven years, the basis step-up increases to 15%, further reducing capital gains taxes.
• Exclusion of appreciation on QOF investments: For investors who hold their QOF investment for at least ten years, any appreciation in the value of the investment is excluded from federal capital gains taxes. This exclusion provides a significant incentive to invest in Opportunity Zones and to maintain the investment long-term.
• Economic revitalization: Investing in Opportunity Zones can lead to the renewal of economically distressed communities, resulting in increased property values, job creation, and improved quality of life for residents. Investors can contribute to positive social and economic outcomes by strategically investing in these areas.
• Diversification of investment portfolio: Opportunity Zone investments provide an alternative asset class for investors looking to diversify their portfolios. By including real estate or businesses in low-income communities, investors can potentially reduce overall portfolio risk while still achieving attractive returns.

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What steps should counsel take to facilitate Opportunity Zone tax compliance?

Counsel should consider the following to protect their clients:

• Identify eligible capital gains: Tax counsel should help investors identify eligible capital gains subject to deferral by investing in a QOF. Applicable capital gains may include those from selling stocks, real estate, and other capital assets.
• Ensure proper QOF structure: Tax attorneys should ensure that the QOF structures as a corporation or partnership. In addition, the QOF organize specifically to invest in qualified Opportunity Zone property.
• Verify QOF investment requirements: Tax counsel should verify that at least 90% of the QOF’s assets invest in Opportunity Zone property. If an investor fails to meet this requirement, the QOF may incur penalties, and the investors may lose tax benefits.
• Monitor holding period requirements: Tax attorneys must track the holding period of the QOF investment to ensure clients take advantage of the available tax benefits, including the 5-year, 7-year, and 10-year holding period milestones.
• Assist with tax reporting and compliance: Tax counsel should assist clients with the necessary tax reporting and compliance requirements associated with Opportunity Zone investments.
• Stay up-to-date with regulatory changes: As tax laws and regulations related to Opportunity Zones may change over time, tax attorneys should remain current on updates to ensure ongoing client compliance.

When a set of facts is appropriate for legal intervention, there are many paths a claimant may take. We are value-based attorneys at Jimerson Birr, which means we look at each action with our clients from the point of view of costs and benefits while reducing liability. Then, based on our client’s objectives, we chart a path to seek appropriate remedies.

To determine whether your unique situation may necessitate litigation or another form of specialized advocacy, please contact our office to set up your initial consultation.

Frequently Asked Questions

1. How do I determine if a property is in an Opportunity Zone?

You can use the Map of Opportunity Zones to determine if a property is in an Opportunity Zone. This interactive map allows you to search for a specific address or navigate the map to find designated Opportunity Zones.

2. Can non-U.S. investors take advantage of Opportunity Zone tax benefits?

Yes, non-U.S. investors can potentially benefit from investing in Opportunity Zones, provided they have U.S. source capital gains. However, these investors would still need to invest in a Qualified Opportunity Fund and meet the same requirements as U.S. investors.

3. Can investments in Opportunity Zones be combined with other tax incentives?

Yes, investments in Opportunity Zones are combinable with other federal, state, and local tax incentives, such as the Low-Income Housing Tax Credit, New Markets Tax Credit, or historic tax credits. Combining these incentives can further enhance the overall financial return on investment.

Have more questions about how Opportunity Zone investing could impact you?

Crucially, this overview of Opportunity Zone tax compliance does not begin to cover all the laws implicated by this issue or the factors that may compel the application of such laws. Every case is unique, and the laws can produce different outcomes depending on the individual circumstances.

Jimerson Birr attorneys guide our clients to help make informed decisions while ensuring their rights are respected and protected. Our lawyers are highly trained and experienced in the nuances of the law, so they can accurately interpret statutes and case law and holistically prepare individuals or companies for their legal endeavors. Through this intense personal investment and advocacy, our lawyers will help resolve the issue’s complicated legal problems efficiently and effectively.

Having a Jimerson Birr attorney on your side means securing a team of seasoned, multi-dimensional, cross-functional legal professionals. Whether it is a transaction, an operational issue, a regulatory challenge, or a contested legal predicament that may require court intervention, we remain tireless advocates at every step. Being a value-added law firm means putting the client at the forefront of everything we do. We use our experience to help our clients navigate even the most complex problems and come out the other side triumphant.

If you want to understand your case, the merits of your claim or defense, potential monetary awards, or the amount of exposure you face, you should speak with a qualified Jimerson Birr lawyer. Our experienced team of attorneys is here to help. Call Jimerson Birr at (904) 389-0050 or use the contact form to schedule a consultation.