Opportunity Zone Fund

25 Replies

Hi Everyone,

I am closing on my first rental duplex in mid-December located in an opportunity zone. I do not yet have an LLC set up for this property and it will be owned by my husband and me at first. We were planning to Quitclaim Deed it to the LLC in early 2019. Based on our research, it appears that you need an LLC to self-certify for the opportunity zone fund. My question is, does the property and/or Mortgage need to be owned by the LLC in 2018 in order for us to file for the opportunity zone fund? Is anything special needed for the opportunity fund itself? Does that "fund" need to be a bank account owned by the LLC? Thanks in advance!

@Kathryn Dunnivant I am in no way an expert but here is how I understand it. You have to buy by Dec 2019 to get the full capital gains tax benefits. After you purchase you are still required to invest into the property. I believe it's 18 months and the investment/renovation/upgrade amount has to match the purchase amount. The funds have to be capital gains, not regular income or savings. You self certify on the IRS website. As for the LLC question, I'm curious to see what others have to say. I'm. Not sure on that. I would assume the funds could come from any account since you are allowed to go into joint ventures, etc. hope this help some.

@Kathryn Dunnivant

I haven't done the research yet - but I don't think it will work if you transfer the property to an qualified opportunity fund. The fund itself has to acquire the property.

The jury is still out on how the IRS will structure the law so it can be easier to understand. You will have to set up an Opportunity Fund and use capital gains from the sale of your investment to fund it not after tax money. The other item to consider.... if you buy the property for $100k and the land is worth $20k then you will have 60 months to invest $80k more into the investment and hold.... at least this is what I thought I read. BUT WILL TAKE ADVICE FROM ANYONE WHO IS MORE QUALIFIED. The longer you hold the better it will be. I think the current number is 10 years and you pay no step up appreciation. ITs still confusing but I think this will be for the investors with big gains that want to reduce tax bill. I heard alot of hedge funds are raising capital to get into these OZ zones. I am still trying to learn to see if I can invest in some of these marked zones in my area to do long term buy and hold with my flip cash. 

Hope others who have more knowledge post so we can all learn.

Thanks for everyone's comments. Seems like no one really has the answers. We might not pursue this year for the property since there's too many questions and we don't even have an LLC yet, but look forward to learning through the process next year!

Hi Kathryn,

I think you can do it!

Here is how:

1. Ensure you had a taxable event (capital gains) from selling, real estate, stocks or a company within 180 days of your purchase. 

2. Put the money into your OZ Fund (must be a partnership or corporation, an LLC can be set up to be taxed like a partnership), you will need to self certify using form IRS form 8996.

3. OZ Fund has 180 days to find a property to invest in and make improvements.

3. The fund must own equity in the property, 90% of the fund must be invested in the Opportunity Zone.

4. Search Zones here to ensure the property is actually in the zone:https://esrimedia.maps.arcgis.com/apps/View/index....

5. If you paid $100k for the property and $40k is land value and $60k is building value. You must invest $60k+$1 into the property to improve it.

6. Improvement must be made into the property within 180 days OR if you come up with a project plan with drawdowns you can have up to 30 months to complete renovations.

7. Note: taxes on the original capital gains must be paid on Dec 31st 2026.

8. Can hold the asset for 10 years and then sell it tax-free!

9. Or the program runs until the year 2048... You could compound your initial investment for the next 27 years and get it all back tax-free!

Opportunity funds can invest in real estate, stock in a private company and even new businesses!

Other things to note:

- The law is not 100% baked at this time but the lanes are there and funds are being set up, if you are not doing anything too exotic you are good to go!

- Currently, there is no basis for which land needs to be improved. The law is not intended for folks to buy land and hold it for 10 years without improving it. If you are going to buy land I'd say follow the above and improve within 30 months with a plan!

- Current law states you cannot invest in 1 single family home, they want multifamily investment. I'd advise on making multiple investments into multiple properties. A BRRR strategy starting with a few units might work out very well in OZ's!

- If you already own land in an OZ and have not met the 180-day timeframe above or purchased the land before Dec 31st, 2017 the only thing you can do to take advantage of this is to take on a partner and own less than 20% of the asset.

That should get everyone started hopefully. I always recommend consulting with your accountant and legal counsel before deciding to do anything with Opportunity Zones as everyone has different circumstances. 

@Mark Elliott Great synopsis. @Kathryn Dunnivant - Hate to say this but this is a topic that would require a knowledgeable legal professional who as actually set-up an OZ fund for someone doing smaller investments such as yours. Most of the ones I've interviewed are assisting larger fund managers (may be out of the $ range) but I would look for them at a conference as well as Indy or Chicago.  

@Mark Elliott : Are you confident that this does not apply to Single Family Residence only? I am planning to make an offer on a Single Family Residence and a CPA told me that it does apply to Single Family Residences. I am planning to make only 1 purchase.

Where is it mentioned that it doesnt apply to SFR?

Originally posted by @Gaurav Mehta :

@Mark Elliott : Are you confident that this does not apply to Single Family Residence only? I am planning to make an offer on a Single Family Residence and a CPA told me that it does apply to Single Family Residences. I am planning to make only 1 purchase.

Where is it mentioned that it doesnt apply to SFR?

You need a new accountant. 

You can buy any real property within a zone. There is absolutely nothing disqualifying SFR.

Man @Natalie Kolodij calling out my accountant! 

Agree with you now that second tranche of regs were released Single Family Residence is a fine investment. Prior to that (and at the time of my original post) consensus was that it was not 100% clear if Single Family Residence would actually qualify. Also, while not as common as commercial leases, any house Triple Net Leased would not qualify as the government wants to see an "active trade or business" for the OZ fund (see link below).

That is unfortuantely one of the many issues with releasing a program as large is this in 3 parts over an almost 18 month period. It creates uncertanty and multiple contradicting opinions. The good news is I think most everyone now at this point is on the same page. I'm very excited to see what the OZ program can do for our communities!

Anyone interested in reviewing the new regs, here is a phenominal summary:

https://www.novoco.com/notes-from-novogradac/clarity-provided-second-tranche-treasury-regulations-incent-more-investment-opportunity-zones 

Originally posted by @Mark Elliott :

Man @Natalie Kolodij calling out my accountant! 

Agree with you now that second tranche of regs were released Single Family Residence is a fine investment. Prior to that (and at the time of my original post) consensus was that it was not 100% clear if Single Family Residence would actually qualify. Also, while not as common as commercial leases, any house Triple Net Leased would not qualify as the government wants to see an "active trade or business" for the OZ fund (see link below).

That is unfortuantely one of the many issues with releasing a program as large is this in 3 parts over an almost 18 month period. It creates uncertanty and multiple contradicting opinions. The good news is I think most everyone now at this point is on the same page. I'm very excited to see what the OZ program can do for our communities!

Anyone interested in reviewing the new regs, here is a phenominal summary:

https://www.novoco.com/notes-from-novogradac/clarity-provided-second-tranche-treasury-regulations-incent-more-investment-opportunity-zones

SFH were never in question- I nor any colleagues ever thought they'd be an issue. Raw land into new construction as qualifying improvement was. But existing SFH was always good to go.

NNN has never been allowed since the original regs- but how the IRS defines it is slightly different from the norm so you can potentially do a modified NNN setup there too.

Originally posted by @Natalie Kolodij :
Originally posted by @Mark Elliott:

Man @Natalie Kolodij calling out my accountant! 

Agree with you now that second tranche of regs were released Single Family Residence is a fine investment. Prior to that (and at the time of my original post) consensus was that it was not 100% clear if Single Family Residence would actually qualify. Also, while not as common as commercial leases, any house Triple Net Leased would not qualify as the government wants to see an "active trade or business" for the OZ fund (see link below).

That is unfortuantely one of the many issues with releasing a program as large is this in 3 parts over an almost 18 month period. It creates uncertanty and multiple contradicting opinions. The good news is I think most everyone now at this point is on the same page. I'm very excited to see what the OZ program can do for our communities!

Anyone interested in reviewing the new regs, here is a phenominal summary:

https://www.novoco.com/notes-from-novogradac/clarity-provided-second-tranche-treasury-regulations-incent-more-investment-opportunity-zones

SFH were never in question- I nor any colleagues ever thought they'd be an issue. Raw land into new construction as qualifying improvement was. But existing SFH was always good to go.

NNN has never been allowed since the original regs- but how the IRS defines it is slightly different from the norm so you can potentially do a modified NNN setup there too.

What is your take on the 30 month improvement at an amount of at least 100% of adjusted basis. From what I'm seeing, it's 100% of adjusted basis at the start of any 30 month period while you own the property. It is not 30 months from date of purchase, and it's not 100% improvement cost vs purchase amount. It is relative to basis at the beginning of the 30 month period you choose, and I am assuming if you used a 1031 with a reduced basis, it would be based on that reduced adjusted basis coming into the property (not purchase price). 

 

Originally posted by @Kirby Davis :
Originally posted by @Natalie Kolodij:
Originally posted by @Mark Elliott :

Man @Natalie Kolodij calling out my accountant! 

Agree with you now that second tranche of regs were released Single Family Residence is a fine investment. Prior to that (and at the time of my original post) consensus was that it was not 100% clear if Single Family Residence would actually qualify. Also, while not as common as commercial leases, any house Triple Net Leased would not qualify as the government wants to see an "active trade or business" for the OZ fund (see link below).

That is unfortuantely one of the many issues with releasing a program as large is this in 3 parts over an almost 18 month period. It creates uncertanty and multiple contradicting opinions. The good news is I think most everyone now at this point is on the same page. I'm very excited to see what the OZ program can do for our communities!

Anyone interested in reviewing the new regs, here is a phenominal summary:

https://www.novoco.com/notes-from-novogradac/clarity-provided-second-tranche-treasury-regulations-incent-more-investment-opportunity-zones

SFH were never in question- I nor any colleagues ever thought they'd be an issue. Raw land into new construction as qualifying improvement was. But existing SFH was always good to go.

NNN has never been allowed since the original regs- but how the IRS defines it is slightly different from the norm so you can potentially do a modified NNN setup there too.

What is your take on the 30 month improvement at an amount of at least 100% of adjusted basis. From what I'm seeing, it's 100% of adjusted basis at the start of any 30 month period while you own the property. It is not 30 months from date of purchase, and it's not 100% improvement cost vs purchase amount. It is relative to basis at the beginning of the 30 month period you choose, and I am assuming if you used a 1031 with a reduced basis, it would be based on that reduced adjusted basis coming into the property (not purchase price). 

 

 It is 100% of the Improvement value (Excluding land value) within 30 months of purchase. Not any 30 months. 

It's worded oddly- but they mean that it can be month 1-3 when the renovations are done, or month 25-30. But it's within 30 month's of acquisition of the asset. 

Here is the actually wording from the initial code, it was also clarified in the most recent IRS release notice on it 

(ii) Substantial improvement

For purposes of subparagraph (A)(ii), property shall be treated as substantially improved by the qualified opportunity fund only if, during any 30-month period beginning after the date of acquisition of such property, additions to basis with respect to such property in the hands of the qualified opportunity fund exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the qualified opportunity fund.

Here's the Proposed reg which clarifies it:



https://www.irs.gov/pub/irs-drop/reg-115420-18.pdf



https://www.irs.gov/pub/irs-drop/reg-115420-18.pdf


Originally posted by @Kirby Davis

What is your take on the 30 month improvement at an amount of at least 100% of adjusted basis. From what I'm seeing, it's 100% of adjusted basis at the start of any 30 month period while you own the property. It is not 30 months from date of purchase, and it's not 100% improvement cost vs purchase amount. It is relative to basis at the beginning of the 30 month period you choose, and I am assuming if you used a 1031 with a reduced basis, it would be based on that reduced adjusted basis coming into the property (not purchase price). Y 

I'd love to have clarity on the 30-month issue, but it seems unclear at this point. Both the initial temporary Regulations and subsequent editions use the same phrase you quoted: "..any 30-month period beginning after the date of acquisition..." 

It totally makes sense that the intention would be "30 months from acquisition" - however the language does not support it when analyzed semantically. First problem: it says "after the date" as opposed to "on the date." Second problem, a bigger one: it says "any period." There is only one 30-month period starting from the acquisition date, and it cannot be described with the word "any." 

Therefore, I conclude that the language of Regulations permits this 30-month period to start at any point after the acquisition. As in - you can buy a property, sit on it for a year, and then start the clock for 30 months. Once the clock starts, then the improvements must be finished within 30 months, but not within 30 months from acquisition.

I very well may be wrong on this, but if I am, I would want someone to explain me the two specific words I pointed out: AFTER and ANY.

What's your take, @Eamonn McElroy , @John Woodrich , @Steven Hamilton II ?

 

@Michael Plaks I agree. I’ve also seen places indicating the adjusted basis at the beginning of that 30 months as the amount needed for improvement... gotta love the clarity here.

Originally posted by @Michael Plaks :
Originally posted by @Kirby Davis

What is your take on the 30 month improvement at an amount of at least 100% of adjusted basis. From what I'm seeing, it's 100% of adjusted basis at the start of any 30 month period while you own the property. It is not 30 months from date of purchase, and it's not 100% improvement cost vs purchase amount. It is relative to basis at the beginning of the 30 month period you choose, and I am assuming if you used a 1031 with a reduced basis, it would be based on that reduced adjusted basis coming into the property (not purchase price). Y 

I'd love to have clarity on the 30-month issue, but it seems unclear at this point. Both the initial temporary Regulations and subsequent editions use the same phrase you quoted: "..any 30-month period beginning after the date of acquisition..." 

It totally makes sense that the intention would be "30 months from acquisition" - however the language does not support it when analyzed semantically. First problem: it says "after the date" as opposed to "on the date." Second problem, a bigger one: it says "any period." There is only one 30-month period starting from the acquisition date, and it cannot be described with the word "any." 

Therefore, I conclude that the language of Regulations permits this 30-month period to start at any point after the acquisition. As in - you can buy a property, sit on it for a year, and then start the clock for 30 months. Once the clock starts, then the improvements must be finished within 30 months, but not within 30 months from acquisition.

I very well may be wrong on this, but if I am, I would want someone to explain me the two specific words I pointed out: AFTER and ANY.

What's your take, @Eamonn McElroy , @John Woodrich , @Steven Hamilton II ?

 

I agree the wording is iffy. 


But in the more recent notice on it they started phrasing as :



"

This expansion of the term “working capital” reflects the fact that section 1400Z2(d)(iii) anticipates situations in which a QOF or operating subsidiary may need up to 30
months after acquiring a tangible asset in which to improve the asset substantially "

"

(30 months after acquisition for rehabilitating existing property
versus 31 months for acquiring and rehabilitating existing property or for constructing
new property).

"


I think the intent is 30 months from day of acquisition. What point would there be to putting a  30 month limit on it if it was at any point during the 10 years?

 

And I guess the other side to my stance is...

I'm I'm wrong- it still qualifies. 

But if I'm right- and it had to be the first 30 months - there could be a problem if the renovations weren't done during that time. 

@Natalie Kolodij

Here’s the part that is being “interpreted” differently in several areas that I’m seeing.

during any 30-month period beginning after the date of acquisition of such property, additions to basis with respect to such property in the hands of the qualified opportunity fund exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the qualified opportunity fund.

Now, I’m seeing multiple interpretations stating this allows for depreciation to change your basis to no longer be purchase price for substantial improvement qualification. Example, purchase price $110,000 with $100,000 allocated toward building. Depreciated down to $80,000, and improved within 30 months from the $80,000 adjusted basis, requiring only $80k in improvement versus $100k.

Originally posted by @Kirby Davis :

@Natalie Kolodij

Here’s the part that is being “interpreted” differently in several areas that I’m seeing.

during any 30-month period beginning after the date of acquisition of such property, additions to basis with respect to such property in the hands of the qualified opportunity fund exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period in the hands of the qualified opportunity fund.

Now, I’m seeing multiple interpretations stating this allows for depreciation to change your basis to no longer be purchase price for substantial improvement qualification. Example, purchase price $110,000 with $100,000 allocated toward building. Depreciated down to $80,000, and improved within 30 months from the $80,000 adjusted basis, requiring only $80k in improvement versus $100k.

Yes it does note that it's the adjusted basis at the beginning of the 30 months. 

So I get what you're saying - but again, none of the CPE or education I've taken on this would line up with that as the purpose of this program.

I'm just not willing to take the gamble on that interpretation. I don't see what the intent/purpose would be for them to put a 30 month limitation on a renovation you could do 9 years in the future. It reads like that could be an option...but sensibly- why? 

@Kirby Davis

Yes, this interpretation does open the door to dropping the basis via depreciation right before starting the 30-month clock. That could be very sweet if it works.

I agree that such loophole can lead to widespread abuse. I agree that the legislative intention probably was not to allow manipulation of the 30-month period in such way. I agree that it may be prudent to take a conservative stance and assume that one day this loophole will be explicitly closed, and those people who planned to benefit from the loophole will be burned.

However, as of today, I still read the language literally, and I interpret it as permitting this loophole. The whole OZ thing is full of strange loopholes anyway. What about the self-certification of the funds? Isn't that ridiculous already? Literally anyone and his cousin can proclaim to be a qualified OZF with virtually no oversight. The IRS has no resources to verify this avalanche of business ventures. 

For my clients, I will not stop them from utilizing this loophole until it's explicitly removed. But I will warn them about the risk of choosing this untested strategy.

Again, if my colleagues can provide a proof of me being wrong - I'll appreciate being corrected on this one.

@Natalie Kolodij .

Definitely don’t disagree with what you’re saying. It has just been left wide open at the moment. I also find it quite difficult to execute on single family houses in areas where housing is somewhat depressed, and homes sell for low prices in an OZ. These houses may be in decent condition, and spending what you paid for it would basically be a gold plated house by the time you were done 😂. It’ll be a fine balance unless the house is falling down in some areas.

Now, serious value add multi family, commercial or raw land is easy to do.

@Michael Plaks

Completely agree with the strange loopholes that already exist and the literal interpretation. I think it could definitely be abused. But also could lead to missed opportunities to improve single family homes in depressed areas where cost is low, but the houses are in decent shape. Investing in these areas at 50% of cost improvement basis would vastly improve the area and values, but 100% of cost would almost never be achievable for any investor, as the payback would never exist. 50% could help the area - because NOTHING is happening now... it’ll be interesting to see how it plays out.

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