1. Compare & Contrast with 1031’s
Opportunity Zones: new IRC §1400Z-1 and Opportunity Zone Funds: new IRC §1400Z-2
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Compare & Contrast with 1031’s
Tracey Wilson, CES®
Vice President
cell/text 24/7
nationwide exchange coordinators

2. Compare & Contrast with 1031’s
Opportunity Zones: new IRC §1400Z-1 and Opportunity Zone Funds: new IRC §1400Z-2
Compare & Contrast with 1031’s
Tracey Wilson, CES®
Vice President
cell/text 24/7
nationwide exchange coordinators

3. Let’s follow the “yellow brick road to OZ…!”
Opportunity Zone or OZ
Let’s follow the “yellow brick road to OZ…!”
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4. OZ: Land deals in eligible tracts from the Bronx to Oakland jump 62%
Source: Real Capital Analytics
Figures show year-over-year changes in the 12-month rolling average value of sales involving development properties.
Betting on OZ’s: Sales of development sites are surging in areas eligible for tax breaks
Investment Property Exchange Services, Inc. | ipx1031.com

5. Opportunity Zones (“O-Zones” or OZ)
There are 8,762 U.S. Treasury certified census tracts (including D.C. and all of Puerto Rico) designated as Opportunity Zones: a new national community investment program that connects private capital with low-income communities across America. (IRS Notice )
The idea behind these zones is to attract investment capital—specifically, capital gains—into “economically distressed” areas. (Rev. Rul )
U. S. households currently hold $2.3 trillion in unrealized capital gains, representing a significant untapped resource for economic development.  And corporate America has at least $3.8 trillion in unrealized gains – that’s $6.1 trillion of gains available for Opportunity Zones. Even if only a fraction of these unrealized gains are tapped, O-Zones could be very beneficial. Treasury Secretary Steven Mnuchin predicted at least $100B of capital would be invested into O-Zones.

6. OZ resources: where to find Opportunity Zones
Opportunity Zones IRS FAQs or
Here are links to interactive maps showing O-Zones:
Colorado:
Wyoming:
Nationwide:
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7. OZ – resources
IRC Section 1400Z-1 governs Opportunity Zones (OZ) and Section Z-2 governs OZ Funds
Designation of certified Opportunity Zones stays in effect until 12/31/2028
Under the proposed regulations, investors can hold onto their investments through 2047 without losing tax benefits. A taxpayer who makes an investment as late as the end of June 2027 to hold the investment in a QOF for the entire 10- year holding period described in section (c), plus another 10 years.
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8. OZ – resources
The number of OZ’s was limited to 25% of the total number of low-income communities in each state…
Low-income requirements for OZ are defined by IRC 45D(e)
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9. OZ – resources
Median income of each Opportunity Zone must not exceed 80% of the metro or state level
Each census tract must have at least a 20% poverty rate
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10. What can be sold?
Important Note:
Stocks
OZ investments receive no step up in basis upon death of investor –
Business
Cannot sell to a related party
Definition of related party is in §267(b) & §707(b) – normally a 50%+ threshold is applied for an entity…
But for OZ the threshold is more strict at just 20%
Partnership or Partnership Interests
Instead the gains become income in respect of a decedent (IRD) §1400Z-2(e)(3) $
Capital Gains
OZ gains taxed as ordinary income if you die !
Only gains need to be invested – the basis is returned tax free
including ETFs, REITs, and RICs
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11. Who can sell these assets and invest in OZ?
Any individual (including SM LLC)
Any partnership or MM LLC
Any trust
Any corporation (Sub-S or C-corp)
To enjoy the benefits of OZ investing you must sell an asset and invest the gains within days – you cannot simply invest your cash into an OZ – what you invest must be the gains from the sale of something
Stocks
Business
Partnership or Partnership Interests
including ETFs, REITs, and RICs
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12. What are the tax benefits for investing in OZ?
Defer the payment of your capital gains until December 31, 2026.
The capital gains must then be recognized, and the capital gains taxes paid – investors don’t have to sell their OZ investment, just have to pay the taxes
Reduce the tax on the deferred gain with a step-up in basis of 10% after 5 years, and an additional 5% step up after 7 years (total of 15% step up in basis).
Pay zero taxes on any new gain from the OZ appreciation after 10 years
Stocks
Business
Partnership or Partnership Interests $
Capital Gains
including ETFs, REITs, and RICs
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13. OZ – timeline showing step up in basis, and example $100 gain
180 days to
$100
$ 85
$ 0
Any new gains from OZ increase is tax free
$ 90 !
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14. OZ – Gains must be recognized in 2026: implications!
By the end of 2026 the capital gains must be recognized (taxes must paid):
To get the 15% step up in basis, you must invest by 12/31/2019 (plus 7 years is 2026)
To get at least a 10% step up in basis, you must invest by 12/31/2021 (plus 5 years is 2026)
Can an investor invest gains in a QOF, sell before either the 5 or 7 year limits, and re-invest in another QOF – and still get the stepped-up benefits? In other words, can you tack on the previous investment period? Not absolutely defined. More Proposed Regulations are forthcoming…
180 days to
$100
$ 85
$ 0
Any new gains from OZ increase is tax free
$ 90 !
5 years invested to get 10% Step Up in Basis
7 years invested to get 15% Step Up in Basis
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15. Partnership or Partnership Interests including ETFs, REITs, and RICs
What types of capital gains are eligible to be deferred and invested into OZ?
Capital gains from a sale or exchange with an unrelated person (more than 20% is a related party).
Eligible capital gains are:
Long-term capital gains
Short-term capital gains
Gains from the sale of a business (§1231); reported on Form 4797
Un-recaptured depreciation (§1250 gains: any gains in excess of straight-line depreciation on real property)
Dividend gains from REIT and RIC (Regulated Investment Companies, such as mutual funds, including UITs)
Collectible gains
Carried interest
Certain Section 1256 contracts (regulated futures contract, foreign currency contract, non- equity option, dealer equity option, or dealer securities futures contract. Each contract held by a taxpayer at the end of the tax year is treated as if it was sold for its fair market value, and gains or losses are treated as either short-term or long-term capital gains.)
Ordinary gains are not eligible – the sale of an asset generating ordinary income: §475 (mark-to-market asset), §1221 (capital asset), §1245 (tangible and intangible personal property), and §1250 (depreciation recapture at ordinary income rates)
Stocks
Business
Partnership or Partnership Interests $
Capital Gains
including ETFs, REITs, and RICs
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16. Gains must be invested into an OZ Fund – not directly into an OZ$
OZ Fund or
QOF
Capital Gains
Stocks
Business
Partnership or Partnership Interests
Opportunity Zones
including ETFs, REITs, and RICs
Investment Property Exchange Services, Inc. | ipx1031.com

17. Let’s focus on QOF: What is an OZ Fund? What can the QOF invest in?$
OZ Fund or
QOF
Capital Gains
Stocks
Business
Partnership or Partnership Interests
Opportunity Zones
including ETFs, REITs, and RICs
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18. OZ Fund or Qualified Opportunity Fund (QOF)
Qualified Opportunity Fund or QOF:
Can be structured as a:
Corporation
Partnership
LLC that is taxed as a partnership or corporation
Self-certified – any taxpayer can create QOF
Form 8996
Must invest at least 90% of its assets in OZ
50% of Gross Income must come from active conduct of business or trade in OZ
Substantially all” (70%) tangible business assets must be used in an OZ.
QOF’s are not eligible as replacement property in a 1031 exchange
QOF is a fund, not real estate – even though it may invest in real estate
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19. What can a QOF or OZ Fund invest in?
QOF can invest in:
Qualified OZ stock
Qualified OZ partnership interest
Qualified OZ business property (tangible real estate)
QOF can invest in OZ business directly or thru subsidiary
QOF cannot invest in another QOF…
What type of business or property can QOF buy?
OZ property or business cannot be purchased from a 20% or more related party. This is substantially more strict than the 50%+ threshold found in §§267(b), 707(b), & 179(d) …
Property or a business must be purchased by QOF after 12/31/ Property that was already held does not meet this definition, and neither does property contributed to a QOF
Original use of the property must commence on or after certified OZ entity
Or the QOF substantially improves existing property
Improvements must be equal to the cost of the building at time of acquisition (not including land), and must be made within 30 months of acquisition
Most businesses qualify except golf courses, country clubs, other “sin” enterprises, such as: gambling establishments, massage parlor, hot tub or suntan facility, racetrack, or store whose principal business is the sale of alcoholic beverages for consumption off premises
During substantially all of the QOF’s holding period, substantially all of the property must be in the OZ
Unanswered Issue: Can a building or structure that is both inside and outside an OZ qualify?
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20. Where do you find a list of Qualified OZ Funds?
Google search…
National Council of State Housing Agencies or NCSHA:
rg/resource/opportu nity-zone-fund- directory/
CoStar:
potcdn.com/fc/e0/0a 438afc4c5ab44fce f4e/opportunit y-zone- directory0118.pdf
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21. OZ Funds & 1031 Exchanges 1031 Exchange
File Form 8824
1031 Exchange
45-Day ID
180-Day Period
Real Property
Real Property
1031 & OZ have same 180 days to invest
But OZs are not a 1031 exchange:
The 180 days to invest is just similar…
OZ investors don’t need to identify (no 45 day ID)
OZ investors don’t need a Qualified Intermediary
Opportunity Zone Fund
File Form 8949

22. OZ Funds & 1031 Exchanges 1031 Exchange Opportunity Zone Fund
Reinvest gain + basis
Real Property
Real Property
Sell for $800K: Basis $300K + Gain $500K
Must buy for $800K: basis & gain reinvested
Sell for $800K: Basis $300K + Gain $500K
Can invest just $500K of gain…Basis of $300K is returned tax free
Opportunity Zone Fund
Reinvest only gain –
basis is returned tax free

23. OZ: split basis and gains – and reinvest just gains
Originally purchased for $400,000. Sell for $1 million. Owned for five years; basis down to $300K; gain is $700K ($600K appreciation + $100K depreciation recapture).
: $400,000
$300,000
Sell:
$1,000,000
$700,000*
*Capital gain of $600K +
Depreciation recapture of $100
Both gains able to be reinvested into QOF
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24. Cannot 1031 exchange into an OZ Fund
Real Property
Not Real Property
It’s a fund…
Even though it may invest in real property
Opportunity Zones
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25. If 1031 identification fails – then there’s still time to get an OZ
180-Days max
45-Days to ID
Day 46
Real Property $
135 Days left to invest into OZ
Opportunity Zones
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26. Past 45-Days ID and exchange fails…run out of time for OZ
45-Days to ID
180-Days max
Day 181 $
Real Property
…too late to invest in OZ
Opportunity Zones
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27. Possible to split sales proceeds between 1031 & OZ
1031 XC
$600K*
*Must include pro rata basis
$750K
QOF
Exchanger can allocate some of their sales proceeds into an exchange, and some into an QOF
…and
Why? Perhaps:
Diversify your investment
If you are selling a business, perhaps some of the gain is goodwill. You cannot exchange goodwill, but you can invest the goodwill gain into an OZ Fund
$150K*
*Pro rata basis is received tax free
Opportunity Zones

28. Comparison of 1031 exchange and OZ
Death of Investor Step up in basis No step up in basis (IRD: income in respect of decedent)
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29. Comparison of 1031 exchange and OZ…continued
OZ Fund
Tax deferral
Potentially permanent
Temporary (until 12/31/2026 max)
Can you do a subsequent exchange?
Yes
No, it is not real estate
Investment Required
Basis + Gain
Capital gain (appreciation & depreciation)
Invest other capital
Yes, increases basis
Yes, but not eligible for tax benefits
Invest in a business No
Minimum hold
Satisfy “held-for” requirement
5 or 7 years to receive reduction of taxes
QI needed
Sell to a related party
Investment property
Real property
Security
Secondary market ?
Eligibility to invest
Anybody
Accredited Investor*
*$200K/$300K annual income for previous 2 years, or $1 million net worth, not including personal home
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30. OZ issues: comparison of OZ and 1031’s
Negative Aspects of OZ
Positive Aspects of 1031
Going into a QOF changes you from owning real estate to owning a security. This means no way to 1031 back into real estate (unlike a DST or TIC)
Tax benefits are not that great – especially compared to which particular OZ the fund invests in…
10% Step up; 15% Step up; After 10 years any new gains tax free
Capital gains must be paid 12/31/2026 (7 years from now)
This could cause a “liquidity event” for the QOF, unless investors have cash at their disposal to pay the tax out- of-pocket
No step up in basis upon death of investor – instead the gains become income in respect of a decedent (IRD); does not apply; taxed as ordinary income
No depreciation expense (until after improvements made within 30 months? – maybe??)
State of California has not adopted QOF legislation – meaning you will still pay CA income tax on your deferred OZ gains
Better choice of geographic area
Stepped up basis upon death
Can buy turn-key properties, with no need to “substantially improve”
Better grade of tenants relative to QOF properties
Elimination of carrying costs when having to “substantially improve” or “develop” a QOF Property
Less Risk:
No regulations on the sponsors of QOFs.
Who is watching the QOF with your money?
Liquidation:
How easy will it be to dispose of shares in a QOF?
Probably less of a market, especially if they turn out to be bad investments
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31. OZ – investing example with asset sold being stock
An investor buys 1,000 shares of Amazon stock in 2013 for $250 per share or $250,000.
In 2019, an individual investor sells the 1,000 shares of AMZN for $1,250 per share, or $1,250,000 – resulting in a $1 million capital gain.   
Taxes would normally be: $238,000 in federal capital gains tax on this sale (20% capital gains + 3.8% ACA NIIT, for a total tax hit of 23.8%),
By investing into an OZ Fund the investor defers paying the taxes and rolls their entire $1 million gain into a QOF that invests the capital in newly issued preferred stock shares of various operating businesses located in Opportunity Zones with a plan to liquidate the fund in   
The assumed value of this investment in 2028 is $2 million.   The benefits received by this investor are:
Investing $1 million instead of the after-tax amount of $762,000
Paying $202,300 in taxes in 2026 instead of paying $238,000 in  (The deferred gain of $1 million incurs a step up in basis of 15%, so that only 85% of the gain, or $850,000, is taxable)
Owing no additional tax on any new capital gains on the Opportunity Fund investment
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32. OZ Fund – more complex issues and questions…
Accredited Investors only? – are there exceptions?
There may be at least three strategies that allow a qualified opportunity fund to be open to its entire community, including non-accredited investors:
1. Real estate fund: A fund whose primary business is investing in real estate and 90% of whose assets consist of real estate in an opportunity zone will be a qualified opportunity fund and will be exempt from the burdensome regulations of the Investment Company Act of 1940 (the “1940 Act”), which paves the way for the fund to raise capital via a direct public offering – making it a true community investment fund.
2. Small business holding company: This type of fund is exempt from the 1940 Act if most of its assets comprise controlled or majority-owned subsidiaries – the idea being that the fund is in whatever business its subsidiaries are in, rather than in the securities investment business. Again, if 90% of its holdings are businesses in opportunity zones, it will also be a qualified opportunity fund.
3. Intrastate fund: A closed-end fund of up to $10 million, all of whose investors reside in the same state, is eligible to seek an exemptive order from the SEC that allows it to raise community capital via a direct public offering and while avoiding all or most of the 1940 Act’s regulations. Such a fund could invest in either business or real estate in opportunity zones and thereby also become a qualified opportunity fund.
With any of these strategies, a community-scale fund can open up the opportunity for community ownership of community assets, with everyone able to participate on a level playing field, and everyone able to reap the profits from local ventures.
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33. OZ Fund – more complex issues and questions…
Depreciation expense – does this flow through to the investors?
Accredited Investors – are there exceptions?
70% of 90%...?
If QOF is a partnership or LLC, does income flow through to investors?
In fact, at least 90% of the assets of the fund must meet the definition of qualified opportunity zone property -- a term that we're going to have to dig into eventually -- in order to remain as a QOF. And to prove this requirement has been satisfied, the fund will average the percentage of its assets that are qualified opportunity zone property twice a year: at the halfway point and again on the last day of the year. If the average of the qualified opportunity zone property falls below 90%, the QOF is going to pay penalty to the IRS on Form 8996.
Q: And how will this 90% be measured? It depends. If the QOF has an "applicable financial statement" -- think: a 10K or audit -- then the fund has to measure each asset at its value as reported on that financial statement. If there is no applicable financial statement, the QOF will look to the cost of each asset.
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34. OZ Fund – more complex issues and questions…
Can that investment take any form: like equity or a loan?
A: Nope. It has to be an equity investment. You have to put cash in the business in exchange for either stock or a partnership interest. A loan won't cut it.
a QOF will be treated as operating with an opportunity zone if at least 90% of its assets are "qualified opportunity zone property" (QOZP). A QOF can invest in QOZP in one of three ways:
By directly conducting a qualified opportunity zone business" (QOZB) by investing at least 90% of its assets in "qualified opportunity zone business property" (QOZBP), or
Indirectly, by acquiring either:
stock in a corporate subsidiary that operates a QOZB, which invests substantially all of its assets in QOZBP.
or an interest in a partnership that operates a QOZB, which invests substantially all of its assets in QOZBP.   
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35. OZ –
council/faqs-on-proposed-opportunity-zone-regulations.aspx#qofinvestmentstreated
Source: work?utm_source=BusinessDen+Daily+NewsFeed&utm_campaign=615446c _CAMPAIGN_2019_01_22_12_33&utm_medium= &utm_term=0_e8b1 506f0c c &gclid=Cj0KCQiAnNXiBRCoARIsAJe_1cqe0JPtv_bJUvXDcocWW1eliwaH8 d3vBeeKU-AfwYHIpor7hy-3uusaAusSEALw_wcB
Questions+on+the+New+Qualified+Opportunity+Zone+Guidance
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36. Questions?

37. VP Colorado, Utah, Wyoming
Tracey Wilson, CES®
VP Colorado, Utah, Wyoming

38. OZ –
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39. Partnership or Partnership Interests including ETFs, REITs, and RICs
What types of capital gains are eligible to be deferred and invested into OZ?
Capital gains from a sale or exchange with an unrelated person. Note: related party is more strictly defined as just 20%
Eligible capital gains are:
Long-term capital gains
Short-term capital gains
Gains from the sale of a business (§1231); reported on Form
Un-recaptured depreciation (§1250 gains: any gains in excess of straight-line depreciation on real property)
Dividend gains from REIT and RIC (Regulated Investment Companies, such as mutual funds, including UITs)
Collectible gains
Carried interest
Certain Section 1256 contracts (regulated futures contract, foreign currency contract, non-equity option, dealer equity option, or dealer securities futures contract. Each contract held by a taxpayer at the end of the tax year is treated as if it was sold for its fair market value, and gains or losses are treated as either short-term or long-term capital gains.)
Ordinary gains are not eligible – the sale of an asset generating ordinary income: §475 (mark-to-market asset), §1221 (capital asset), §1245 (tangible and intangible personal property), and §1250 (depreciation recapture at ordinary income rates) $
Stocks
Business
Partnership or Partnership Interests
including ETFs, REITs, and RICs
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40. OZ – taxpayer benefits 12/31/2026 Must pay tax
Basis is received tax free
10% step up in basis
Additional 5% step up in basis, for a total of 15%
New gains tax free
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41. OZ – timeline showing step up in basis
$100
$ 85
$ 0
tax on any new gains from OZ profits
$ 90
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