Investing in Opportunity zone without a fund

4 Replies

I'm closing on a house next week that happens to be in an opportunity zone. I will be doing substantial work on the house - my rehab budget is larger than the cost of the house. I also have lots of unrealized capital gains in the stock market at the moment, so I'm trying to figure out how to take advantage of the OZ. I was planning on closing in my personal name so I could get a Fannie/Freddie loan when I go to refi in a few months. Everything I see on OZs talks about investing in a fund, however I don't want to invest in a fund - I want to invest directly in the property. So two questions:

1 - Can I buy the house as an individual using my using capital gains and defer the taxes, or must I create a QOF to purchase the house?

2 - If the answer to #1 is that I must create a QOF, then what's the simplest way to go about this? Since the QOF must file IRS form 8996 I assume it must file its own tax returns, so a disregarded entity like a single member llc will not be good enough. Do I need to create a C or S corp? What's the easiest way to do this given that I'll be using all my own money?

3 - Given that the answer to #2 is probably still somewhat complicated and time consuming, are there firms or individuals popping up yet who will do it all for me? (including filing the IRS forms, etc.)? 

@Ari Bachrach

Needs to be held in either a partnership or corporate tax entity that self certifies as a QOF.

Don't try to DIY this, there are requirements and deadlines on both the investor side and the fund side that need to be met.  Hire a CPA/EA that is very comfortable with 1400Z-2.

You can't have it without a fund. 

Typically don't want property in a corp so I'd recommend a 1065 partnership return, having that become a fund. 


I agree with Eamonn you'll want a tax pro to handle this filing- it's new and messy.


@Ari Bachrach -- echo what Eamonn and Natalie said.  Partnership doesn't have to be 50/50 -- I have a number of clients who have structured the partnership 99.9% - 0.1% in a manager-managed entity, so they retain the lion's share of profit interests and control, but still have a good partnership for IRS purposes.  Assuming your contract is assignable, its definitely possible to get a fund up and running and assign the contract to your QOF prior to closing.

@Ari Bachrach

I agree with my colleagues on everything except asking a CPA/EA to form a QOF. This is a job for an attorney experienced in this area and intimately familiar with the evolving IRS guidance on QOF. One attorney I highly recommend is John Hyre:
https://www.taxreductionlawyer.com/services

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