On December 22, 2017, Congress adopted legislation including Qualified Opportunity Zones as part of the Tax Cuts and Jobs Act, which provides for deferral of long-term capital gains tax and, in some cases, a significant step up in basis and elimination of long-term capital gains.  This little-known, rarely-mentioned provision in the $1.5 trillion tax cut is projected to save investors $1.6 billion in capital gains taxes over the next 10 years – to say nothing of the exceptional returns that investors can make on well-advised investments. Opportunity Zones present a compelling investment opportunity.

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"Opportunity Zones have the potential to become the most impactful federal incentive for equity capital investment in low-income communities ever enacted."

- Letter to Acting Commissioner of the IRS, June 18, 2018.

Selection of Qualified opportunity Zones

Governors of each state designated 25% of low income census tracts in each state.  The Secretary of the Treasury confirmed the QOZ census tracts on June 20, 2018.  QOZ designations last 10 years.  To qualify for tax deferral, an investor’s capital gains must be reinvested into a Qualified Opportunity Fund within 180 days from the date of the sale or exchange that generated the capital gain.


Defer Taxes; Increase Basis; Full Step Up at Sale


 QOZ Overview:

• QOZ investment can be used to (i) defer capital gains, (ii) increase the basis of original capital gains amount, and (iii) avoid capital gains on new investments.

• Investors can defer tax on capital gains until the earlier of (i) the date the investment is sold or (ii) December 31, 2026.

• Long-term investment is incentivized by allowing for a step-up in basis:


5 years

10 percent increase in basis of the original capital gain


7 years

Additional 5 percent increase in basis of the original capital gains


10+ years

Increase in basis in QOF equal to the FMV of the investment on the date the investment is sold

1031 Exchange Qualified Opportunity Fund
Timeline 45-day identification period and 180-day exchange period. 180 days to invest in a fund.
Scope Limited to properties identified during 45-day period. The fund can invest in nearly any type of asset located in an opportunity zone.
Tax Deferral Capital gains tax deferred until sale of property. Capital gain tax deferred until earlier of sale or 2026, plus step up in basis:
  • 5 year 10% step up in basis of original capital gains
  • 7 year 15% step up in basis of original capital gains
  • 10 year 100% step up on gains above the original investment
Investment Amount Reinvest entire basis and capital gains in new property. Reinvest only capital gains.
Sale Capital gains tax deferred upon sale of old property after rolling all sales proceeds into new property. Deferred capital gains tax not due upon sale of old property. Taxes due (subject to step up in basis) upon the earlier of (i) the date the property is sold, or (ii) December 31, 2026.
Type of Capital Gain Limited to capital gains from the sale of real estate. No limitations on the capital gains asset class, including real estate, stock, personal property, intangibles assets, etc.
State Tax Typically state tax law tracks the federal laws and tax is deferred. Many states have not yet declared whether they will track the new federal law. Precedent suggests California may follow the federal law, but this outcome is not certain.
Investment Income Tax Tax deferred until the date the property is sold. Similar to 1031 Exchange, tax is deferred until the earlier of (i) the date the property is sold, or (ii) December 31, 2026.
 
 
 
 

Example: Capital Gain Investment in Qualified Opportunity FunD

  • Investment into QOZ Fund: $10M

    • New Property Price: $30M

    • Debt on New Property: $20M

    • Basis at Year 0: $0

    • Basis at Year 5: $1M

    • Basis at Year 7: $1.5M

    • Recognize deferred capital gain taxes on December 31, 2026:

    • (Capital Gains Rate 20%) X ($8.5M) = $1.7M

    • Tax savings on recognition date: $2M - $1.7M = $300K

  • Sale at Year 10: $40M

    • Capital gains: $10M

    • Capital gains tax due at sale: $0

    • Tax savings from depreciation recapture: $1.5M

    • Tax savings at sale: (Capital Gains Rate 20%) X ($10M) = $2M

    • Total Tax Savings at year 10:

      • $300K + $1.5M + $2M = $3.8M

 
Many groups are racing to the newly created Opportunity Zone space, but they lack a multi-decade, vertically-integrated firm to execute on projects. JMA is uniquely positioned to be a leader in the QOZ space because of its internal expertise and established track record managing and completing complicated investment and development projects. Given the strict guidelines for deployment of capital and timeline for construction imposed by the Act, an ability to execute will be critical to the success of any Qualified Opportunity Zone investment.
— Todd Chapman

JMA Ventures, LLC

Since 1986, JMA Ventures has been committed to providing superior investment services that deliver compelling real estate transactions with high risk-adjusted market returns and long-term value for our partners. JMA prides itself on being a diverse real estate investment firm, with a portfolio encompassing hospitality, resort, destination, residential, retail, office and commercial developments.

The recently enacted Opportunity Zone legislation creates a once-in-a-cycle opportunity to invest in high-performing assets in good locations, while capturing unprecedented tax benefits that supercharge investor post-tax returns.  Prior to the enactment of Opportunity Zone legislation, JMA was already actively investing in low income communities and city centers as part of its value add strategy.  JMAs Fund will invest in multi-family, hotel, office, retail and mixed use real estate projects located in Opportunity Zones.

JMA Projects Over Time

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 The Bay Club Company  Headquartered in San Francisco, CA

The Bay Club Company

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