More Opportunity Zones/Funds Clarification

[Account Closed]

I have been searching and reading prior threads, but thought I'd go ahead and start a new thread since there has been time for people to learn more about opportunity zones, rather than have to sort through a bunch of older posts.  I hope that's okay.

I've been reading up on opportunity zones the last few days, and found this IRS publication where they're trying to clarify the rules: https://www.irs.gov/pub/irs-drop/reg-115420-18.pdf

I still find it confusing.  I'm trying to grasp the 90% rule.  I'm hoping some of you knowledgeable people will help me analyze a specific example.

Let's say I set up an S corporation, with only myself, so I have the proper type of entity without partners.

I sell a property and have $20,000 subject to capital gains tax after the sale.

I then create a QOF (qualified opportunity fund) with the $20,000.

I want to buy a property in a QOZ (qualified opportunity zone) and hold it for 10 years.

I know I have to spend an equal amount on the property and in refurbishing it.

So, if I want to buy a $50,000 property and put $50,000 in repairs and upgrades to it, can I do this and be able to get the benefits of the QOZ?

It looks like the rules are saying that the $100,000 I'd put into the property would have to be 90% subject to capital gains, so I'd have to actually have $90,000 in capital gains, and my $20,000 wouldn't qualify me.

On the other hand, one example used in that document I linked to mentioned a partnership borrowing money and the borrowed money didn't count toward the 90% rule - unless it's only talking about working capital, which has shorter limits, etc.  I'm unclear about this.

Can someone explain to me what I could do in the above scenario?  What would my options be?  Unfortunately, other than clarifying that pass-through corporations, such as an S corporation are allowed, there weren't examples for a single S corporation without partners buying real estate.

I did see that you only have to double the value of the building and not the land, so there would be a bit of a break there.  But, mostly, I'm trying to understand the overall numbers that qualify for the 90% rule.

Thanks!

[Scott McIntosh]

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%.