Setting up an opportunity zone fund

[Manas M.]

I found several posts about QOZF on BP but don't have a satisfactory answer to this question yet. I know a turnkey property that is doing some new construction in an OZ. I am pretty sure they must be using some of OZ benefits to develop these areas. 

Now, if I setup an LLC as an QOZF and purchase one of these new construction (perhaps with 50% in leverage), would this purchase satisfy all requirements of the OZ program? 50 % of funds would come from my personal funds which are eligible capital gains.

My thoughts are since would be a new construction, it wouldn't require  a "substantial improvement". However, what gives me doubt is that fact that I am not purchasing land and developing from ground up (which would have made this eligible definitely IMO). 

[Philip Ma]

Hi Manas, I have my own QOF and have been acquiring new construction properties located in QOZ areas from the builder. I take the position that acquiring and renting out a new build constitutes "original use" under the QOZ rules and therefore does not require further substantial improvement. I wrote a blog post about it here: https://www.biggerpockets.com/...

If you look on page 489-490 of the final QOZ regs, it has a definition of "original use" which I believe supports this position, i.e. you as the buyer would be the first person to place the tangible property into service for depreciation purposes.

On your question about using 50% eligible gain (in a QOF LLC) and 50% non-eligible gain for the Qozbp purchase, I think it's possible if you structure the 50% of personal funds as debt to your QOF, i.e. you set up a note just as you would with a 3rd party lender and make monthly payments to yourself out of the QOF at a market rate of interest. I would work with a tax attorney or CPA to ensure that the note would hold up under audit as a debt instrument.

Hope that helps.