I found several posts about QOZF on BP but don't have a satisfactory answer to this question yet. I know a turnkey property that is doing some new construction in an OZ. I am pretty sure they must be using some of OZ benefits to develop these areas.
Now, if I setup an LLC as an QOZF and purchase one of these new construction (perhaps with 50% in leverage), would this purchase satisfy all requirements of the OZ program? 50 % of funds would come from my personal funds which are eligible capital gains.
My thoughts are since would be a new construction, it wouldn't require a "substantial improvement". However, what gives me doubt is that fact that I am not purchasing land and developing from ground up (which would have made this eligible definitely IMO).
Hi Manas, I have my own QOF and have been acquiring new construction properties located in QOZ areas from the builder. I take the position that acquiring and renting out a new build constitutes "original use" under the QOZ rules and therefore does not require further substantial improvement. I wrote a blog post about it here: https://www.biggerpockets.com/...
If you look on page 489-490 of the final QOZ regs, it has a definition of "original use" which I believe supports this position, i.e. you as the buyer would be the first person to place the tangible property into service for depreciation purposes.
On your question about using 50% eligible gain (in a QOF LLC) and 50% non-eligible gain for the Qozbp purchase, I think it's possible if you structure the 50% of personal funds as debt to your QOF, i.e. you set up a note just as you would with a 3rd party lender and make monthly payments to yourself out of the QOF at a market rate of interest. I would work with a tax attorney or CPA to ensure that the note would hold up under audit as a debt instrument.
Hope that helps.
@Philip Ma Thanks for the reply and really pumped to hear from someone actually exercising the plan I have been thinking about. I have read through the regs earlier but there were couple of lines that were confusing to me.
1) Page 491 has an example of a hotel developer but it says the developer constructs the building with intent to sell it to a QOF. I am not sure what the intent really means (does the developer certifies it somehow? Do they get some tax advantages by demonstrating this intent). I am sure the SFH I have looked at are not exclusively for OQF so do they still qualify? Or the intent of developer don't matter if the OQF can satisfy the first use requirement (by buying directly from the developer).
2) Also, not sure if the developers depreciate the units while they are siting vacant. If they do, I guess that would violate the first use requirement.
oh btw, thanks for writing up your experience on the blog. I found that very informative.
@Manas M. My pleasure, I'm glad you found it useful.
On your #1, my reading of the example is that the "intent and expectation" language is meant to emphasize that the developer does not intend to depreciate the building but rather to sell it as inventory to the QOF. I don't think the developer would derive any tax advantage under the QOZ rules for having that intent. This fact pattern is just providing a clear (extreme) example of the QOF satisfying the original use test. The actual definition of original use on page 489-90 has nothing about intent of the seller/developer, so I am not concerned if the builder does not have specific intent to sell to a QOF in my purchases.
On your #2, typically a builder would treat the new construction building as inventory on their balance sheet, not as a depreciable asset (unless they couldn't sell the inventory and decided instead to operate the building as a rental). On my last new construction purchase, I negotiated for a statement in the purchase agreement which stated the the seller/builder would not be placing the property into service for purposes of depreciation prior to the close of escrow. They had no problem agreeing to that statement (it was a small sized builder, so they are probably more flexible than the big names). While a statement like that provides me with some comfort in the event of audit, I don't see it as necessary to satisfy the original use requirement.
In the bigger picture, I think that the risk is extremely low on your position being challenged, but that's obviously up to you. I would run it by a tax professional familiar with your facts and the QOZ rules. Keep in mind that it's a new law, so even the tax professionals are guessing on some of the grey areas. Hope that helps.