Timing for Opportunity Zone Investment

[John Vietmeyer]

I have a contract on a duplex and just realized it is in an opportunity zone.  Wondering if the following is possible:

1) set-up a LLC and self certify as an opportunity zone

2) used hard $ fund to close on the property 

3) sell property to create a capital gain

4) Use capital Gains to renovate the new duplex in opportunity zone (100% of purchase price) 

5) refinance or sell more property to payoff Lender. 

6) Rent and hold 10 years to maximize tax benefit. 

[Scott McIntosh]

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.