I own two rental properties under and LLC which I purchased in the last year. The LLC consists of two equal partners, and both of these properties were purchased in opportunity zones. I am looking to take advantage of the tax benefits that opportunity zones can offer, and I am wondering if I can simply re-write the existing operating agreement to make the LLC an opportunity zone fund, or do I need to form a new entity and sell the properties to the newly formed opportunity zone fund. Thank you in advance!
I would consult a real estate accountant, as there are serious possible tax consequences to just rewriting an LLC.
@Josh Starner there are a number of considerations.
First a qualified opportunity zone fund is not something you write into corporate or LLC documentation. It is simply a self certification you send in to the IRS at the end of the tax year.
Second you have to meet the substantial improvement test to qualify when you buy a property in the Ozone. This means you have to spend an equal amount of the value of the structure on improving the property.
There is a lot of info out there about what you can and can’t do.
As mentioned its best to speak to an. Account or tax attorney well versed in Ozones.
The timing is also of importance here. When the property has been acquired. When the OZ fund was created, etc... Consult with an attorney well versed in OZ.
@Alina Trigub John Hyre would be a great attorney to help with this issue.
I think your message was addressed to Josh, as he's the one looking into OZ fund.
Originally posted by @Ian Brower :
@Alina TrigubJohn Hyre would be a great attorney to help with this issue.
You cannot, OZF can only be purchase after Jan 1, 2018. You cannot convert a preexisting property into a OZ and the new owners cannot have any sort of familial relationship with you - for obvious deception loop holes. Additionally it's helpful to keep in mind you have to use 100% of acquisition cost into renovation of the property. Once you have kept it for the 10 years is when the real benefits comes into play with the tax deferment.
That's pretty high level explanation but there are several OZ experts in the site that would give you more intimate feedback of this program.
Generally, it is definitely possible for an existing entity to qualify as an opportunity fund. You can pick the first date of qualification when the Form 8996 is filed.
However, the effective date that LLC is qualified as an opportunity fund must be before the date the assets were purchased. The qualification (Form 8996) isn't filed until the LLC's partnership tax return is filed, so you do have some latitude to pick a date retroactively. The Form 8996 instructions require a purpose statement in the LLC Agreement by the end of its first year of qualification, 2018 in your case (see instructions under "Line 3" at https://www.irs.gov/pub/irs-pdf/i8996.pdf). There are differing opinions on the the ability to amend your LLC Agreement to include the purpose statement with a retroactive effective date, but it certainly gets more difficult to justify if significant time has passed.
Assuming you actually have gains within 180 days prior to the date you invested your money in the LLC, and assuming your LLC met all of the requirements for the properties to qualify (purchased from unrelated party, meet the 50% "substantial improvement" test, etc.), there are some that could tell you that qualifying your existing LLC could be an outside possibility depending on your tax risk appetite, but I likely wouldn't recommend especially if you have already filed 2018 tax returns.
On the second scenario, you definitely cannot create a new entity and sell your properties to the new entity. Because the two entities are related, the assets would not be qualifying OZ assets.