Puerto Rico Earns Opportunity Zone Designation - Relocate to Puerto Rico with Act 20 & Act 22

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Puerto Rico Earns Important Opportunity Zone Designation

 

On April 18, 2018, Governor Ricardo Rosselló of Puerto Rico announced positive and encouraging news for the island: the U.S. Treasury Department and the IRS officially designated PR as an Opportunity Zone as defined under the US Tax Cuts and Job Act of 2017. According to Rosselló, “These zones are created to foster investment in the nation’s disadvantaged communities. New investments in Opportunity Zones can receive preferential tax treatment, which will, in turn, be a boost to our economy.”

Structuring a Qualified Zone Business

To begin, an investor must commit funds to a Qualified Opportunity Fund. A minimum of 90% of the assets from this fund must be invested in Qualified Opportunity Zone properties. These assets include:

  • Tangible property acquired in 2018 or later which is used in the business or trade of a Qualified Opportunity business. Original use of the property must originate with the Qualified Opportunity Fund or, if acquired, the fund must substantially improve the property.
  • Qualified Opportunity Zone stock is any domestic corporation operating as a Qualified Opportunity Zone business during most of its holding period; the stock must be procured in 2018 or later and paid for in cash (not cash equivalents or illiquid assets).
  • Qualified Opportunity Zone partnerships mirror the terms and conditions placed upon Qualified Opportunity Zone stocks, but they are held in the form of a domestic partnership (instead of shares in a domestic corporation).

Any business whose assets are significantly composed of qualified opportunity zone properties is considered a qualified zone business.

Tax Deferred Benefits for Qualified Opportunity Zone Investors

Investments in Opportunity Zones earn deferrals on capital gains taxes. The deferral period ends at the time the investor sells its investment in the Qualified Opportunity Fund or December 31, 2026, whichever is earlier. The gain is calculated as follows:

  1. Determine the cost basis of the investment (determined to be $0 initially).
  2. Subtract the lesser of the excluded gain or the fair market value from the cost basis.
  3. The difference is the capital gains that must be declared.

The cost basis of the investment, which starts out as zero, will increase (thus reducing potential capital gains) based upon the following timeline:

  • If the investment is held for at least five years, the cost basis for the taxpayer will increase by 10% of the deferred gain. For example, if the deferred gain is estimated to be $1 million, the cost basis will increase by $100,000, or 10% of the $1 million deferred gain.
  • If the investment is held for at least seven years, the taxpayer is granted an additional 5% increase in cost basis to 15% of the deferred gain. Using the example above, the cost basis would increase to $150,000, or 15% of the $1 million deferred gain.
  • If the investment is held for at least 10 years and extends beyond the December 31, 2026 maximum deferral date, the cost basis of the taxpayer’s investment becomes equal to the fair market value of the investment, ending up with no capital gains to declare.

The best approach for a Qualified Opportunity Fund investor is to commit funds for at least one decade. Investors willing to risk funds in distressed communities for an extended period will be able to take full advantage of the tax savings that can accrue.

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