During our Q3 and Q4 Opportunity Zones webinars last year, we received many great questions covering a wide range of important topics. To help further your understanding of this exciting new program, our General Counsel, Kelly Alton, a nationally recognized tax attorney who previously worked at the IRS Office of Chief Counsel at the National Office in Washington, DC, has partnered with our co-presenter, Novogradac & Company, to provide responses.
This is the first installment of our Opportunity Zones Q&A blog series, in which we’ll post questions of particular interest along with our responses. We hope you find them helpful!
Q: If I own a property in a Qualified Opportunity Zone and decide to recapitalize and bring in investors to develop the project, would their investments qualify as a Qualified Opportunity Zone investment even though I purchased the property myself?
A: This is often a challenging situation because of the effective date of the Opportunity Zone legislation. Keep in mind that the property must qualify as Qualified Opportunity Zone Business Property. To qualify, the property must be acquired after 12/31/17, and must be acquired from an unrelated party (using a 20% common ownership threshold for relatedness). If this rule is not met, then your scenario would not qualify.
Additionally, to qualify as Qualified Opportunity Zone Business Property, the property must be either put to its original use or must be substantially improved after its acquisition by the fund. Based on your facts, it sounds like the property was previously in use, in which case it probably would not qualify as “original use.” However, based on your facts implying that the property would be developed using the cash from new investors, you may be able to meet the substantial improvement requirement as long as the improvements to the property are made within a 30-month period and equal or exceed the original basis in the property.
Finally, to qualify as Qualified Opportunity Zone Business Property, substantially all of the use of the property must be in a Qualified Opportunity Zone.
Some OZ Fund developers have been exploring the idea of forming a limited liability company (LLC) (with the intention that the LLC qualifies as a Qualified Opportunity Fund), and the LLC acquires an existing building from an unrelated party, either using debt or equity. After the acquisition, the LLC admits new members who make cash equity investments in the LLC within 180 days of their gain realization event. Those equity investments are used to substantially improve the building. In theory, assuming all other regulatory requirements are met, this scenario should enable those cash equity investments in the LLC to qualify under the Qualified Opportunity Zone program.
If you’d like more information on Opportunity Zones, please take a look through our web-based OZ resource center — or feel free to contact us at 1-800-339-1031.