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Christopher Wang Two Kings Real Estate

Opportunity Zones. Christopher Wang Two Kings Real Estate. Opportunity Zones. Once-In-A-Lifetime Opportunity to Reduce & Eliminate Capital Gains Taxes Christopher Wang | chris@twokingsrealestate.com. “The Most Unbelievable Tax Break Ever”

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Christopher Wang Two Kings Real Estate

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  1. Opportunity Zones Christopher Wang Two Kings Real Estate

  2. Opportunity Zones Once-In-A-Lifetime Opportunity to Reduce & Eliminate Capital Gains Taxes Christopher Wang | chris@twokingsrealestate.com

  3. “The Most Unbelievable Tax Break Ever” Inspired by tech billionaires and politicians, Opportunity Zones have created one of the greatest tax-avoidance plans in history to encourage investment in underdeveloped areas - Forbes Magazine

  4. The Opportunity for Opportunity Zones A program intended to have a positive social impact Program created to spur investment in low-income and distressed neighborhoods About 500 census tracts designated in New York state; 300 are located in NYC Eligible capital gains can come from any type of asset: Stocks, Real Estate, Art, Bitcoin, etc The only other means to completely avoid capital gains tax is the exemption for primary homes (limited to $250k/$500k) 1 3 2 4

  5. Tax Incentives Tax incentives are used to attract capital to the underserved areas ⏰ ↘ 🚫 Normally when you sell an asset for more than you paid for it, you would have to pay tax on the profit (“capital gain”). If you invest that profit in an Opportunity Zone, you could benefit from these tax incentives: TAX DEFERRAL Payment of original capital gains tax is deferred until latest date of Dec 2026 TAX REDUCTION The amount of capital gain subject to tax can be reduced by up to 15% TAX ELIMINATION Appreciation from the new Opportunity Zone investment can be tax free

  6. Opportunity Zone Investment Timeline Illustration of tax benefit based on duration of OZ investment Sell appreciated asset(s); contribute capital to OZ fund and defer paying capital gains tax If OZ investment is sold after Year 5, tax is owed on 90% of original capital gains (10% reduction) If OZ investment is sold after Year 10, NO capital gains tax is owed Capital Gain If OZ investment is sold after Year 7, tax is owed on 85% of original capital gains (15% reduction) Original Asset(s) DURATION OF OZ INVESTMENT YEAR 7 (or Dec 2026) YEAR 1 YEAR 5 YEAR 10

  7. Map of Opportunity Zones: US Designated Opportunity Zones

  8. Map of Opportunity Zones: Manhattan / Bronx Source: PolicyMap.com

  9. Map of Opportunity Zones: Brooklyn / Queens

  10. Map of Opportunity Zones: Queens

  11. Eligible Investments QOF funds must be invested into businesses with most of its assets and income-producing activity located within an Opportunity Zone. • Construction & operation of a new apartment, hotel or office building • Significant rehabilitation of a vacant building into rental property • Business with most of its equipment and staff located in an OZ

  12. Why Opp Zones? Opportunity Zone tax incentives can be big business for those with large tax events • Entrepreneurs or early investors selling shares (via private sale, IPO) • Family offices or private equity groups looking to sell long-term holdings (in stocks, real estate, other assets) • Landowners with existing properties in Opportunity Zones

  13. Maximizing Tax Benefits • Need to be confident in future appreciation of the OZ investment • A significant amount of the OZ benefit is tax-free appreciation from the new investment (i.e. no tax on profit from selling OZ property after 10 years!) • Underlying economics must support future growth • Ongoing income from the OZ investment is subject to ordinary income tax • Borrowing debt is permitted and interest expense may help offset some income • If you have high taxable income each year but no appreciation upon sale, is it worth it? • Choice of investment structure is a critical decision! • Investment decisions (i.e. selling an OZ property) may have massive tax consequences • Partnerships or fund participation for 10+ years

  14. Thank you. Once-In-A-Lifetime Opportunity to Reduce Capital Gains Taxes Christopher Wang | chris@twokingsrealestate.com

  15. Some Basics Only capital gains qualify for tax benefits. If funding is from both capital gain and non-capital gain sources, the tax benefits are applied on a pro-rated basis. Proceeds from selling an appreciated asset must be contributed to a “Qualified Opportunity Fund” (QOF) entity within 180 days of sale. The QOF has 30 months to invest funds in eligible OZ projects. QOF must invest at least 90% of its capital in eligible OZ projects (or other QOFs). The QOF can designate working capital for specific future uses and include it in the 90% capital test. 1 3 2 4

  16. Investment Structure A QOF can directly own qualified OZ business/property ... … or it can own stock or interests in other QOFs or OZ partnerships QUALIFIED OPPORTUNITY FUND QUALIFIED OZ BUSINESS/PROPERTY QOF or OZ PARTNERSHIP QUALIFIED OZ BUSINESS/PROPERTY QOF or OZ PARTNERSHIP

  17. OZ Investment Qualification Qualified OZ Property > The use of the property must commence with the QOF investment (“Original Use” Test); OR > The property must be improved at a cost at least equivalent to its original value** (“Substantial Improvement”) ** Excluding value of land! Qualified OZ Business > Substantially all (> 70%) of assets are Qualified OZ Property > At least 50% of income is generated by the business’ activity

  18. Investment Considerations Investing individually > Full control of investment decisions and timing (over a potential 10+ year horizon) > Challenges of acquisition, management and financing of investments Investing in a Fund > Timing of project exit is controlled by others (with major tax consequences) > Potentially no choice of investment types or geographies Heading for the Exit Doors > OZ tax consequences are triggered when the interest or stock in an OZ investment is sold > Proper structuring may give flexibility to sell interest OR property when the time comes

  19. Other Topics • Related party rules (20% ownership threshold) • Property leased to NNN (doesn’t count!) • Use of capital gains from a partnership (ex. LLC) - 6 months • Investment of proceeds from a 1031 exchange • Re-investment of proceeds from selling OZ property or interests

  20. April 17 Guidance: Original Use / Eligible Property • Long-vacant properties (for 5 years or more) qualify for “original use” investment. • land qualifies for original use only for business use (such as a hotel) • Triple net leases will not be part of the opportunity zone program. • Original use of property starts on the date that property was acquired. • An existing property could qualify for original use as long the property was not previously used in a way that would have allowed it to be previously depreciated or amortized by any taxpayer. • Improvements made by a lessee to leased property satisfy the original use requirement Sources: KPMG/Bisnow/ IRS

  21. April 17: Substantially All / Death = no tax A key part of the newly released guidance clarifies the ”substantially all” requirements for the holding period and use of the tangible business property: • For use of the property, at least 70 percent of the property must be used in a qualified opportunity zone. • For the holding period of the property, tangible property must be qualified opportunity zone business property for at least 90 percent of the QO Fund’s or qualified opportunity zone business’s holding period. • The partnership or corporation must be a qualified opportunity zone business for at least 90 percent of the QO Fund’s holding period. Sources: KPMG/Bisnow/ IRS

  22. April 17 Guidance: Deploying and harvesting Capital • New rules would provide a minimum of 6 months starting from the time a fund raises a round of capital to when they need to place that capital. • investing funds a 1-year grace period to sell assets and reinvest the proceeds, • Individuals won’t be taxed for any fund-level activity as long as they don’t take distributions. • Tax benefits will be tied to an investor’s duration invested in a fund versus the duration of the fund Sources: KPMG/Bisnow/ IRS

  23. April 17 Guidance: Liquidity/ Death • The proposed regulations generally allow a debt-financed distribution (subject to the disguised sale rules) provided that the amount distributed does not exceed the partner’s basis in its partnership interest; Debt adds to the basis • The guidance notes there are situations where deferred gains may become taxable if an investor transfers their interest in a QO Fund. For example, if the transfer is done by gift the deferred gain may become taxable. However, inheritance by a surviving spouse is not a taxable transfer, nor is a transfer, upon death, of an ownership interest in a QO Fund to an estate or a revocable trust that becomes irrevocable upon death. Sources: KPMG/Bisnow/ IRS

  24. April 17 Guidance: Safe Harbor for Business • at least 50% of the hours the employees or contractors work are spent within the opportunity zone, • 50% of the company's services are within the area or • if the management and operations are based in the designated zones (fact & circumstances evaluation) Sources: KPMG/Bisnow/ IRS

  25. Resources • Economic Innovation Group: https://eig.org/opportunityzones • Empire State Development: https://esd.ny.gov/opportunity-zones • Tax Foundation: https://taxfoundation.org/opportunity-zones-what-we-know-and-what-we-dont • IRS: https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

  26. Thank you. Once-In-A-Lifetime Opportunity to Reduce Capital Gains Taxes Christopher Wang | chris@twokingsrealestate.com

  27. Illustrative Example: Lower East Side - 148-150 Attorney Street, NY, NY Assumes long-term capital gains tax of 32.62% ( 20%, 3.8% plus 8.82% state Must hold 10 years for Op Zone benefits. Equity required is lower for Op Zone due to immediate tax deferral

  28. Original Use Below is a section from the actual law.(i)In generalThe term “qualified opportunity zone business property” means tangible property used in a trade or business of the qualified opportunity fund if—(I)such property was acquired by the qualified opportunity fund bypurchase (as defined in section 179(d)(2)) after December 31, 2017,(II)the original use of such property in the qualified opportunity zone commences with the qualified opportunity fund or the qualified opportunity fund substantially improves the property, and(III)during substantially all of the qualified opportunity fund’s holding period for such property, substantially all of the use of such property was in a qualified opportunity zone.Here is the actual law: https://www.law.cornell.edu/uscode/text/26/1400Z-2I added the yellow and I made the or bold. The whole point of the opportunity zone is to encourage development in these cenus tracks. The idea is that raw land, or ( a for example a night club ) that is knocked down and a new building application is filled and approved, and then a QOF puts it into its' original use as a residential property it will qualify.There are two tracks: NEW DEVELOPMENT ( our project, and the original use test) which is about putting land or destroying something with an undesirable CofO ( like a night club). and RENOVATION ( this is the substantial improves test ) which is about renovating a crappy existing residential building into a nice residential one. The current physical structure on our propetry has no C of O. It is a pile of bricks. Until it has a c of o AND it is rented, it is not in service in its original use. If the person still struggles to understand this --- ask them what they think the point of the original use language is if its not making a new development.

  29. The Basics • Only capital gains qualify for tax benefits. If funding sources include both capital gains and non-capital gains, the tax benefits are applied on a pro-rated basis. • Proceeds must be invested in a Qualified Opportunity Fund (“QOF”) within 180 days of selling an asset and incurring capital gains (however the QOF has a longer period to deploy the capital into eligible investments). • Eligible investments must 1) Have most of its assets (>70%) located in an Opportunity Zone, and 2) Generate majority of income (>51%) from business activity in an OZ. • How do rental apartments qualify?

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