I’ve heard that the second round of regulations provided options for existing property owners. What can I do?
Property needs to be acquired after Dec. 31, 2017, and have its original use in the zone. There are safe harbors for vacant property and substantially improved property. As to operating businesses, they have to meet several tests, including that at least 70% of its assets are acquired or leased after Dec. 31, 2017, from an unrelated party.
There are two choices: the master lease option or the capital cycle option. In the master lease option, the existing landowner entity master leases the dirt to a QOF or QOZB, and the lessee constructs and owns all improvements. In this scenario, the dirt is not QOZBP, but the improvements are. In the capital cycle option, the existing landowner sells to a QOF or QOZB owned by an unrelated party, and then the existing landowner takes the capital gain proceeds and invests in the acquiring QOF or QOZB. The catch with this option is that the existing landowner has to own less than 20% of the equity in the QOF or QOZB to avoid invalidating the tax benefits under a substance-over-form or anti-abuse theory. The advantage, though, is that the dirt would be QOZBP in this scenario.
Yes, the second tranche of proposed regulations allow for a contribution of OZ property (cash or non-cash) into an OZ fund. However, to benefit you would still have to have an otherwise recognizable qualifying capital gain transaction for which you want to defer the tax. If you do have capital gain, then you would be able to contribute property to an OZ fund, whereby the amount of eligible deferral would be equal to the lesser of tax basis or FMV of the contributed property.
There are lots of good provisions for existing owners to avoid related party and substantial improvement.
You may - emphasis on the may - be able to form an Opportunity Zone, complete appropriate transaction documents and upgrade the facility in some material way and then get appropriate tax treatment under the law. But I could not say for sure until I review your proposed structure and plan.
It is possible for current property owners to substitute property for gains realized elsewhere. Where it complicates things is in qualifying the property as QOZ business property, which requires it be purchased. A contribution is not a purchase but the 90% test allows for some non-eligible property.
Existing owners can sell to an OZ fund and then take an interest in the fund with the gain proceeds. As long as the ownership interest in the new fund is under 20%, the gain can be deferred and future gains tax-free after 10 years. If the interest is over 20% and tax benefits are lost due to related party rules. The other ting you can do is to lease the property to the OZ fund. Leasing does not create an interest. Then invest in the fund with other capital gains.
There are three ways to get the property property into an OZ projeect, but there are issues with each. One, a sale to the QOF, but if the owners of the land end up owning more than a 20% interest in the QOF the related-party rules apply and the land may be an ineligible asset in the fund. If held by a subsidiary QOZB the disqualified status may be OKif the land is less that 30% of the total assets. It's unclear from the regulations but may be possible to sell the land to a land QOF (with no ownership by prior land owners) and then set up a building QOF that the land owners may hold an interest possibly greater than 20%. Two, the owners can simply enter into a ground lease with the QOF that will construct a building. The problem here is the land gets no step-up and the land owners will need to sell another asset to invest in the building QOF. Third, the final option is to contribute the land to the QOF. Again the owners must generate a gain from another asset to roll into the QOF. In addition, only the tax basis in the land is eligible to defer gain from other sweet sales. The difference in fair market value and tax basis is a non-qualifying investment and creates a mixed fund, the non-eligible portion intelligible for basis step-up and gain exemption.
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