Opportunity Fund tax question

[Patrick Sears]

Hello,

Wanting start an Opportunity Fund to buy and hold SFR property located in Opp Zone. Planning on it being single-member LLC (taxed as corp, not partnership) for now to get started. From the reading I've done it sounds like any money I wanted to contribute to buy my first property for it would have to come from recent capital gains I incurred due to the sale of something (unlike a 1031, where the money can come from anywhere). Is this true? I know it's true for investors, but how about the original developers and creators of the fund?

Also, I really wanted to sell the plan property in 10 years and not have to pay capital gains tax on the appreciation of the plan property.  Everywhere I have looked just talks about eliminating the capital gains on the original investment-but no discussion on the treatment of gains on the plan assets (which is what I really want to eliminate when I cash out, instead of having to roll into a 1031).

Thoughts?

[Brandon Hall]

@Patrick Sears no, I believe @Ashish Acharya 's #2 statement is incorrect. 

You only eliminate gains on gain proceeds you invest, including holding for 10 years. If you invest "fresh" funds, you will not receive any benefit. 

Link to the code: https://www.law.cornell.edu/uscode/text/26/1400Z-2

Code Language:

IRC Sect. 1400-2(c) In the case of any investment held by the taxpayer for at least 10 years and with respect to which the taxpayer makes an election under this clause, the basis of such property shall be equal to the fair market value of such investment on the date that the investment is sold or exchanged.

This often confuses people and they think that any investment qualifies for the 10-year exclusion. But if you scroll down a bit, you'll see that's incorrect due to an exception:

IRC Sect. 1400-2(e)(1) In the case of any investment in a qualified opportunity fund only a portion of which consists of investments of gain to which an election under subsection (a) is in effect—

   (A) such investment shall be treated as 2 separate investments, consisting of—

      (i) one investment that only includes amounts to which the election under subsection (a) applies, and

      (ii) a separate investment consisting of other amounts, and

   (B) subsections (a), (b), and (c) shall only apply to the investment described in subparagraph (A)(i).

The (B) subsection is the killer. It says that subsection (c), which is the first section I posted above that allows any investment to qualify, only qualifies if it related to the investment described in subparagraph (A)(i). And subparagraph (A)(i) describes the portion of the investment that is only attributed to gains. 

Hope this helps.