All Forum Posts by: Scott McIntosh

Kate -- The incentive is really about attracting new capital to Opportunity Zones, which often makes it difficult to take advantage of the incentives for previously-acquired OZ property.  Related party rules prevent current owners of OZ property from owning more than 20% of an Opportunity Fund that acquires the property, so you'd have to bring on some other investors and be willing to take a much smaller stake in this property to make it work.  No issues with having a mortgage on OZ property, though -- you can use as much leverage as you like.  

Agree -- that kind of tax-free profit on an owner-occupied property is hard to beat.  I'd sell and look for ways to use those proceeds for future investments.  

Cheri — you have to create your opportunity fund and place the recent capital gains from the sale of the SF condo into the opportunity fund within 180 days. You have at least 6 mos, often more, to find a new OZ property to purchase/substantially improve. 

No penalties for selling before the full 10 year hold. You just won’t get the tax-free treatment on the sale. 

If you sell after 3 years, your only benefit will be deferring your capital gains for three years. If you sell after 5, you’ll get a 10% reduction in the amount of deferred capital gain subject to tax. 

John -- once you've met the substantial improvement threshold then yes, the 90% test will be pretty simple for a single-asset entity.  Until then, though, its not quite as clear-cut because cash counts as a non-qualifying asset for purposes of the test. 

So if your hard money loan + capital contribution = $200k, you buy the property for $100k, your balance sheet would be $100k OZ property and $100k cash, which would just be 50% of your assets in OZ property.  Your first testing date is 6 mos after creation of the qualified opportunity fund, so maybe that's ample time to deploy the capital you plan to spend on improvements.  If not, you want to consider a standard construction loan (or see if you can phase-in your hard money loan) so you can take draws as you need them. 

With regard to the substantial improvement threshold, its not exactly 100% of the purchase price.  You get to back out the value of the land, so you'll just have to do capital improvements equal to the value assigned to the building.  Using the 100k purchase price in the above example, if you can reasonably assign $30k in value to the land, you'll need to make at least $70k in capital improvements to the structure. 

John— yep, that process should work.

You’ll just want to look closely at your renovation timeline and be sure you don’t have too much cash in the funds account on your first testing date. Too much cash can screw up your 90% compliance test. Seems like you’ve done your research, but opportunity funds must be a partnership or Corp, so just be sure you’re not setting up as a single member llc. There are some IRS requirements for the funds operating agreement you’ll want to be cognizant of, too. 

Yes, that's how it'll work.  As long as you invest some or all of the recently realized capital gain in an opportunity fund within 180 days of the realization event, you will be able to record the deferral on you 2019 tax return.  

Sue -- using non-OZ cash instead of debt won't effect your 90% requirement, but it will dilute the value of your OZ investment.  When you sell, after 10+ years, only 1/5 of your gain at sale would be tax-free because only 1/5 of your equity was qualifying deferred capital gain.  If you have an extra 80k, I'd recommend executing a loan to the business during the construction/renovation period and then replacing it with permanent financing after completion.  Then your equity investment is exclusively the qualifying capital gain and you'll enjoy the full tax-free upside. 

Hi @Account Closed

What you describe would work. The 90% test is not related to the amount of deferred capital gain you invest. Rather, it is based on the total assets of the fund.

In your scenario, I assume you used your 20k equity and 80k of debt to complete the purchase and renovation. Once complete, your QOF owns opportunity zone property with a cost basis of $100k. Assuming you have no other assets, 100% of your fund’s assets would be opportunity zone property and you would pass the 90% test.

If you also had $20k of cash in your fund’s account at your first testing date (because you drew too much on your loan, or failed to distribute rental proceeds, for example), you’d fall short because $100k/$120k is less than 90%. 

@Ross Wlodawsky

You need to subscribe in your personal name. As a practical matter, the deferral is recorded using code z to remove the realized gain from the tax return of the person/entity making the OZ investment. Since the LLC does not have any capital gain to defer, you wouldn't be able to record a gain deferral and the investment would not qualify for OZ benefits.

@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.