Opportunity Zones

Maximizing the Tax Benefits of Opportunity Zone Investments

The nearly 9,000 census tracts across all 50 states, the District of Columbia, and five U.S. territories that have been designated as Qualified Opportunity Zones present unique and tax-favorable investment prospects across a range of asset classes, including real estate development, operating businesses, start-up ventures, infrastructure projects, Public-Private Partnerships, and mixed-use developments.

Taft’s guidance allows our clients to avail themselves of the three primary tax benefits offered by the Opportunity Zone program:

• The temporary deferral of capital gains taxes.
• A reduction of deferred gains through a step-up in basis.
• The complete exclusion of capital gains on appreciation from Opportunity Zone investments held for at least ten years.

Opportunity Zone investments provide alternative investment options and a surprisingly flexible strategy that can enhance the use of other tax deferral and tax minimization strategies, like IRC Sec. 1031 like-kind exchanges and IRC Sec. 1202 Qualified Small Business Stock capital gain exclusions. Further, OZ investment strategies can combine nearly any economic or tax credit structure within the investment strategy, including low-income housing tax credits, new markets tax credits, energy tax credits and any number of State and Local grant and credit programs aimed at community redevelopment projects or job creation.

The OZ investment structure is useful across many diverse client types, including, family offices where philanthropic and tax-efficient investment strategies can be combined with debt to initiate or round out difficult community revitalization projects.  Similarly, the OZ investment structure can be blended into traditional real estate development structures, combining debt and depreciation allocations to structure attractive investment platforms or used more simply to acquire land for storage or other less complex real estate developments.  Further, business owners can expand business operations through the use of capital gains and OZ Funds where new operations or capital expansion projects are launched in designated OZs.  This can include the infusion of new capital for the purchase of new equipment, facility expansions and new product launches in designated OZ locations.

Taft delivers comprehensive, holistic counsel informed by our attorneys’ knowledge of tax, finance, real estate, project finance, private equity, securities, and corporate law. Our collaborative ethos across practice groups and offices ensures that tax planning, business strategy, and broader investment portfolio considerations work in concert to achieve our clients’ objectives.

Comprehensive Representation for Every Aspect of Opportunity Zone Participation

Taft’s complete, end-to-end suite of Opportunity Zone services includes:

• Fund Formation and Structuring: Taft assists sponsors in structuring and forming QOFs and QROFs, ensuring compliance with investment standards and other technical requirements.
• Due Diligence and Transaction Structuring: Our attorneys conduct meticulous due diligence on potential OZ investments, evaluating whether properties and businesses meet the “substantial improvement” threshold, and structuring transactions to optimize tax benefits while prudently managing regulatory risk.
• Investor Guidance: We provide clear, proactive guidance on timing requirements, including the critical 180-day reinvestment period for capital gains, and offer strategic insights into the tax implications of different holding periods.
• Integrated Tax Planning: Our Opportunity Zone and Tax teams work together to help clients navigate the intersection of Opportunity Zone rules with other tax provisions, including like-kind exchanges, qualified small business stock, carried interest regulations, and state-level tax incentives.
• Transaction Documentation: We structure lease arrangements, secure financing, draft working capital plans and negotiate partnership agreements that comport with Opportunity Zone regulations while protecting our clients’ interests.
• Regulatory Compliance: Taft’s attorneys stay abreast of the latest developments and modifications to the OZ program, including the significant changes ushered in by the OBBBA, as well as regulations, revenue rulings, and administrative guidance to provide clients with accurate, up-to-date advice. We conduct ongoing compliance monitoring to ensure funds maintain the mandated investment standards throughout the holding period.