The Internal Revenue Service (IRS) on Oct. 19, 2018, issued abundant advancing proposed regulations (the Proposed Regulations) and added advice on tax allowances arising from investments in “qualified befalling zones” that was added to the U.S. tax cipher as allotment of the contempo Tax Acts and Jobs Act of 2017 allowable by the U.S. Congress on Dec. 22, 2017 (2017 Tax Act).
Section 1400Z of the 2017 Tax Act allows taxpayers who admit taxable basic assets as a aftereffect of a auction or barter of acreage to invest, aural 180 canicule of the auction or exchange, all or a allocation of the bulk of the accretion in businesses or backdrop (including absolute property) amid in areas appointed as “qualified befalling zones” (Qualified Befalling Breadth Properties), to accept to:
Only basic assets accomplished from affairs with different parties afore Jan. 1, 2027, may be deferred pursuant to the befalling breadth advance tax regime.
To authorize for these tax benefits, the aborigine charge accomplish the advance through a appropriate purpose advance agent (referred to as a Able Befalling Fund) in the anatomy of a U.S. association or a U.S. affiliation (or a U.S. bound accountability aggregation that is advised as a affiliation or as a association for U.S. federal assets tax purposes) organized for this purpose. Such an advance agent can be formed by a sponsor and be broadly held, or it can be formed by the aborigine itself and endemic by the aborigine and accompanying parties.
To authorize as a Able Befalling Fund, the advance agent charge accomplish abiding that at atomic 90 percent of its assets are comprised of able befalling breadth backdrop (i.e., it does not authority added than 10 percent of assets that are not able befalling breadth properties). There are defined testing periods for testing acquiescence with such 90 percent-asset analysis and additionally a binding self-certification action to be followed by the Able Befalling Armamentarium entity.
As an another to advance anon in a acreage amid in a able befalling breadth and accepting to accommodated the 90 percent asset analysis requirement, the Able Befalling Armamentarium may advance in an article that operates a business in the able befalling breadth and which qualifies as a “qualified befalling breadth business.” Such an article will authorize as a “qualified befalling breadth business” if at atomic 70 percent of the actual acreage endemic or busy by its barter or business is a able befalling breadth business acreage (which agency that such article can accept an absolute bulk of abstract acreage in its business no bulk breadth located). An absorption in a “qualified befalling breadth business” article that is captivated by a Able Befalling Armamentarium is advised as a able befalling breadth acreage for purposes of the 90 percent asset analysis that applies to Able Befalling Funds
Key Credibility for Investors
Magnitude of the able befalling breadth investments tax break. Congress’ Joint Committee on Taxation gave this tax breach affairs an estimated bulk of $9.4 billion over bristles years (i.e., 2018-2022), which translates to an appraisal of added than $40 billion of able befalling breadth investments amid 2018 and 2022.
Traps for the unwary. The rules applicative to such tax breach are complicated, cryptic in abounding respects and present abounding accessories for the unwary, including the following.
IRS proposed regulations. Prior to arising of the Proposed Regulations, taxpayers and tax practitioners were active with affective advanced with such tax-advantageous investments because the able befalling breadth advance rules that were allowable as allotment of the U.S. tax ameliorate amalgamation in December 2017 larboard abounding changing questions, some of which are actual significant.
The Proposed Regulations and added advice issued by the IRS on Oct. 19, 2018, attack to acknowledgment some of the “gating” questions apropos the allowable legislation. The antecedent advice offered by the Proposed Regulations is accepted to jump-start investments pursuant to such tax-advantageous program. Abounding added questions abide unanswered. Added sets of regulations and advice are accepted to be issued in the accessible months. (See Holland & Knight’s alert, “New Advice on Befalling Zones: Incentives for Investments in Low-Income Communities,” Oct. 22, 2018.)
The Proposed Regulations are proposed to be able on or afterwards the advertisement date of final regulations, but they acquiesce acceptable taxpayers and Able Befalling Funds to await on the Proposed Regulations afore the final regulations’ date of annual if they administer the rules in their absoluteness and in a constant manner.
State and bounded assets tax treatment. The able befalling zones advance tax administration may or may not action agnate allowances for accompaniment and bounded assets tax purposes, depending on whether the accurate accompaniment of abode of the aborigine choses to chase the federal tax treatment. The New York Accompaniment Department of Taxation and Accounts said that cessation or exclusion of assets will breeze through to New York taxpayers (with a admonition that New York could accede decoupling from the federal provision). The California Franchise Tax Board, on the added hand, declared that California will not accommodate to the cessation and exclusion of basic assets reinvested or invested in Able Befalling Funds.
We Can Help
Holland & Knight attorneys are accessible to assignment with our audience on alignment investments pursuant to the Able Befalling Zones advance tax regime. Members of our aggregation are additionally alive carefully with industry groups on IRS regulations, advice and interpretative issues in this area. For added advice apropos Able Befalling Zones, acquaintance the authors or accredit to Holland & Knight’s beforehand three-part active alternation on this issue. (See “Tax Reform’s New Incentives for Investments in Low-Income Communities: Allotment 1, Allotment 2 and Allotment 3.”)
Qualified Befalling Zones Investments Program: Allegorical Example
On Oct. 31, 2018, a U.S. individual, alleged A, sells shares in about traded aggregation X, acumen a taxable basic accretion for U.S. federal assets tax purposes of $10 million. Bold that A captivated her X shares for added than one year, the U.S. federal assets tax contrarily payable on such 2018 taxable accretion is $2 million, application the 20 percent abiding basic assets tax bulk about applicative beneath accepted law to a auction of basic assets by individuals afterwards a captivation aeon of added than one year (and assuming, for purposes of this example, that it charcoal the abiding basic assets tax bulk in approaching years).
On April 1, 2019 (i.e., aural 180 canicule of the auction of the X shares by A), A invests $10 actor in Article M, a partnership, a bound accountability aggregation or a association formed by A (or addition else), which is accepting for $2 actor acreage amid in a appointed “qualified befalling zone” and borrowing and application the antithesis of A’s disinterestedness advance to advance the acreage as residential rental property.
Within 30 months of its acquisition, Article M develops the absolute acreage commences its business as residential absolute property. For purposes of this example, it is affected that at all times, Article M satisfies the altitude for actuality advised as a “Qualified Befalling Fund” (including not captivation added than 10 percent of assets that are not able befalling breadth property).
As a aftereffect of authoritative such able befalling breadth investment:
Appendix II: Q&A
Certain “Gating” Questions Addressed by IRS Proposed Regulations and Added Befalling Zones Advice Issued on Oct. 19, 2018
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