Opportunity zone property depreciation

[Manas M.]

Hello BP folks,

Can anyone help me understand how to handle depreciation for real estate properties held in an opportunity zone fund? As per my understanding, the external basis of the partner in the fund is zero (assuming no other debt) at the time of fund setup. Now, if every year we take out distribution equal to the net rental income, it would keep the basis to zero. However, if we further depreciate the property, that would further lower the basis below zero. Is that ok ?

If we reduce the distribution to account for depreciation, the income would accumulate in the fund as potentially non-OZ property and could make the fund fail 90% test.

What is the right way to handle this?

Thanks