On March 21, 2018, Alabama Governor Kay Ivey nominated 158 population census tracts (at least one in each of Alabama’s 67 counties) for designation as “qualified opportunity zones” (“opportunity zones”) pursuant to the Tax Cut and Jobs Act of 2017 (the “Act”) signed into law by President Trump on December 22, 2017. To see a list and map of the tracts nominated by Governor Ivey, click here.
Governor Ivey’s nominations represent potentially significant news for Alabama governments, businesses, and real estate developers.
Now that Governor Ivey has made her nominations and notified Treasury Secretary Mnuchin of such nominations “in writing” as required by the Act, the Treasury Secretary has thirty (30) days to certify the nominations and designate the tracts as opportunity zones. Once so certified and designated, and subject to additional guidance to be issued by the Treasury Secretary, taxpayers will be able to elect to exclude from federal taxable income gains from the sale or exchange of property (“deferred gains”) provided, among other things, (i) such gains are invested in one or more certified “qualified opportunity funds” (“opportunity funds”) (more on opportunity funds below) within 180 days of such sale or exchange and (ii) such fund(s) make qualifying investments (“qualifying investments”), either directly or through specially formed corporations or partnerships, in population census tracts designated as opportunity zones. The deferred gains would ultimately be subject to federal taxation at the end of the holding period of such investment or December 31, 2026, whichever comes first. The deferred gains would remain subject to taxation under applicable state tax laws.
Additionally, and importantly,
- the initial basis of investments of deferred gains in opportunity funds is set to zero (0);
- if such investments are held at least five (5) years, the basis is increased by an amount equal to ten (10) percent of the amount of deferred gains;
- if such investments are held at least seven (7) years, the basis is increased by an additional five (5) percent of the amount of the deferred gains;
- if such investments are held on December 31, 2026, the basis is increased by the amount of the deferred gains (due to income recognition on the deferred gains); and
- if such investments are held at least ten (10) years, the basis is, at the election of the taxpayer, determined to be equal to the fair market value of such investment on the date it is sold or exchanged.
In other words, under the right structure(s), a taxpayer may be able to defer taxes on gains until at least December 31, 2026 and could avoid federal income tax all together on any additional gains beyond the deferred gains if the qualifying investments are held for at least ten (10) years.
Under the current version of the Act, the “qualified opportunity zone” designations will expire ten (10) years after the date of designation by the Treasury Secretary.
At the moment, no guidance has been issued on the “qualified opportunity fund” certification process, but it is anticipated that the process will be overseen by either the CDFI Fund within the U.S. Department of Treasury or the Internal Revenue Service in a process similar to the qualified community development entity (CDE) certification process under the new markets tax credit (NMTC) program codified in Section 45D of the Internal Revenue Code, except that no published list of certified funds will be kept.
Many of the underlying rules of the Opportunity Zone program, including those relating to qualifying investments, are similar to the rules pertaining to the successful NMTC program. Maynard Cooper has over a decade of experience in the NMTC program, serving as counsel to, among others, owners and developers of office buildings, hospitals, alternative energy production facilities, hotels, shopping centers, college/university buildings, and manufacturing facilities in low-income communities in Alabama and throughout the United States.
For more information on the Opportunity Zone or NMTC programs, or for help in assessing whether a particular project, property or investment would be eligible for either program, please reach out to one of our experienced professionals in our Economic Development and Incentives Practice, Fund Formation and Investment Management Practice, Public Finance Practice or Real Estate Practice.