Opportunity Zones How To Question

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Opportunity Zones How To Question

David London
Rental Property Investor · Queen, NYC · Member since 2018 · 63 posts · 22 votes

Hi,

Just made an offer on a house located in an opportunity zone and trying to figures the particulars of how it works.

From my research I have some understanding of the big picture of the zones but am quite confused about the details.

The deal from what I see so far possibly qualify:

1. Located in an approved zone.

2. House is in need of some renovation (although condition is livable overall...and currently rented).

3. We are planning to sell stocks to buy the house.

My first question are:

1. Which properties in a zone are eligible properties?

2. How do one go about setting a Qualified Opportunity Fund? Do I need to buy the house as an LLC? I am planning to partially BRRR out after renovation and thus will probably be much easier if bought privately.

3. What is the timeline of the process? Do I need to do all before closing or can it be handled later?

Appreciate any links to resources that explain how individuals can take advantage of the opportunity zones...from my reading so far it seem to be more geared towards the larger investors then individuals.

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Bryan Mills
Attorney · Birmingham, AL · Member since 2016 · 43 posts · 28 votes
7y

@David London

There’s a lot to consider here. First, will you have enough gains to fully fund the project. What is the purchase price for the property? What is the expected rehab cost? The rehab cost needs to equal or exceed the purchase price of the house (however, you can exclude the value of the land in that calculation).

Yes, you need to buy through an LLC. In fact, you will need at least one other partner in the LLC too, because a wholly owned LLC cannot be a qualified opportunity fund. From a documentation, the LLC operating agreement will need a few extra provisions to comply with the Opportunity Fund requirements.

A fund is easy to set up from an IRS standpoint, you simply file a form 8996 with the LLC's partnership tax return. The hard part is making sure you navigate all of the asset restrictions and compliance rules to certify that your fund actually does qualify.

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  • Kevin Martin
    Jacksonville, FL · Member since 2013 · 226 posts · 116 votes
    7y

    Based on my research...

    1. Residential and commercial property

    2. You fill out a form for the IRS and check a box....

    3. You have to file the form with the IRS the tax year when you bought the property. 

    using loans and rehabbing properties gets in the weeds with the details of what is allowed and not. 

    I am not an accountant or lawyer.....

    0Reply
  • Bryan Mills
    Attorney · Birmingham, AL · Member since 2016 · 43 posts · 28 votes
    7y

    @David London

    There’s a lot to consider here. First, will you have enough gains to fully fund the project. What is the purchase price for the property? What is the expected rehab cost? The rehab cost needs to equal or exceed the purchase price of the house (however, you can exclude the value of the land in that calculation).

    Yes, you need to buy through an LLC. In fact, you will need at least one other partner in the LLC too, because a wholly owned LLC cannot be a qualified opportunity fund. From a documentation, the LLC operating agreement will need a few extra provisions to comply with the Opportunity Fund requirements.

    A fund is easy to set up from an IRS standpoint, you simply file a form 8996 with the LLC's partnership tax return. The hard part is making sure you navigate all of the asset restrictions and compliance rules to certify that your fund actually does qualify.

    3Reply
  • David London
    OP
    Rental Property Investor · Queen, NYC · Member since 2018 · 63 posts · 22 votes
    7y

    @Bryan Mills

    Thanks. Not what I wanted to hear but what I suspected to be the case...the repairs in this case definitely don't equal the purchase price...and I do max out the funds which will qualify for capital gains so the repairs will have to come from post-tax savings.

    From the little I researched it does look like an incentive geared more towards larger investors and I suspect will squeeze the opportunity out of these zones for the little players...I'm not even sure what make that census tract qualify since the market seem super hot as is...houses are back at 2007 prices yet get offers in less then a week.

    0Reply
  • Account Closed
    Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes
    7y

    The requirements go a bit deeper than that, and are still being interpreted further by a lot of different firms.  

    Check this out:

    https://eig.org/opportunityzones/about

    0Reply
  • Jon Schwartz
    Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes
    7y

    @David London, I hate to rain on anybody's parade, but the lawyers fees to establish an Opportunity Zone Fund for the purchase of a single house will definitely outweigh the tax advantages therein.

    If it's a good deal, buy the house. The fact that it's in an Opportunity Zone is great; development investments will be attracted the community, and you'll see some nice appreciation. I'm pursuing this strategy in an opportunity zone in Northwest Arkansas -- without setting up an Opportunity Zone Fund.

    1Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7y

    @David London

    You have to purchase the property through a qualified opportunity fund.
    Not the most difficult to set up. 
    However, you do want to make sure you do everything correctly.
    Otherwise you risk the IRS coming down with taxes due, interest and penalties.

    You may want to consult with an attorney or accountant prior to proceeding.

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
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  • Bryan Mills
    Attorney · Birmingham, AL · Member since 2016 · 43 posts · 28 votes
    7y

    @Jonathan Schwartz

    I tend to agree, larger projects are better suited to absorb the additional transactional costs. I guess it could still make sense for a tax savvy investor that can get comfortable navigating the OZ rules themselves.

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