Getty
Is IRC Section 1400Z
Really the law, or a parody?
When Congress and the President passed the TRA
The Economic Opportunity Zone rules came into play.
At IRC Section 1400Z
Real estate and other investors shouted with glee
Under this new and fantastic provision
Taxpayers have factors to weigh in their decision
If little savvy Sally has $500 of capital gain
She can invest some or all in a Fund if tax deferral or reduction is her aim
An Economic Opportunity Zone Fund may only be
An S corp, C corp or partnership incorporated as an LLC
Once the entity exists and Sally puts in her capital gains
Taxes will not be one of Sally’s pains
She must contribute to the LLC that has special language in its Articles of Incorporation
Per the new rules, which cause those of us who only put the language in the Operating Agreement an uncertain sensation
And while we all knew that she had her 180 days to form the LLC and fund it after the capital gains sale
There has been uncertainty over what happens if she will be paid over time under the installment method, causing her advisors to go pale
The new Regulations thankfully allow
The taxpayer to base the installment sale gain on the entire amow(nt)
This is the amount that is otherwise being deferred,
Or separate or annual payments of principal so there is a first choice, a second choice, and a third
And also, if she has what we call 1231 losses and gains
She can offset the gains with the Economic Opportunity Zone investment, and use all of the ordinary losses as to not cause her pains
Another nice thing that the Regulations did that isn’t a pity
Was to allow a “sin business” in the same Economic Opportunity Zone entity
If it is a relatively small proportion of what that entity plans
For example, establishments that are primarily serving liquor, giving massages or spray-on tans
Can be affiliated with and owned together with a large store that sells fans
And for estate planning lawyers, and those who help clients make transfers
The new Regulations would cause even Rudolph the Reindeer to pull off his antlers
If Carley invests in an EOZ Fund
And transfers ownership to her husband, whether by reason of divorce or for fun
She triggers the capital gains that were otherwise being deferred
And the 10 or 15% reduction in the capital gains tax amount which really seems absurd
But she will still have no tax upon the eventual sale of the trade and business more than 10 years after acquisition
So it is sort of bad like spraining your elbow, but is not like being a victim of the Spanish Inquisition
Other actions that can be taken that will prematurely trigger the deferred capital gain and cause loss of the 10 or 15% capital gains reduction
These include transferring partnership interests or S corporation stock to others or making gifts of Qualified Funds no matter what the function
On the other hand, and not so bland
Transferring assets between a grantor and a grantor trust will not cause such triggering, for reasons we understand
But if you toggle off grantor trust status and the grantor trust owns an EOZ investment
Then the payment of those capital gains will have to take place soon thereafter, and thus in time not distant.
The fund must invest at least 90% in EOZ property
But can invest only 70% if using a subsidiary structured properly
A 50% test will apply
But three safe harbors make is easy to comply
If at least half of the funds income, salaries or hours worked are in the zone.
Then tax savings the fund will bring home
While December 31, 2019 marked the end of the 15% exclusion
Tax free growth on investment is the taxpayer’s main motivation
While having a zero basis in the taxpayer’s investment in the fund may be a problem
Income and debt can solve them
We were sad to see the new anti-abuse provision
Because its application may be beyond comprehension
So from the 544 pages
There are not many outrages
Except that for all the time and effort we have spent to learn these rules
Many carpenters, plumbers and electricians could have been building houses with their tools.
And many Economic Recovery Zones
Will have new government-subsidized eCigarette stores, medical marijuana clinics, brothels (in Nevada) and parking lots with rented mobile homes.
A PowerPoint we gave on this topic
Is available if you e-mail us at [email protected] before they stop it.
Thanks for enduring this rhyming haberdashery.
Don’t forget your loved one next anniversary.
If you ever saw the movie, Night of the Living Dead,
Remember the colossal losses that some people have suffered buying the wrong kind of business at the wrong time and then watching it as it bled.
Perhaps my next poem should be an ode,
To the Bankruptcy Code.
I hope you enjoy this little ditty
I’m sorry I am not as smart or as witty