All Forum Posts by: Austin Hendrickson

@Lee Ripma - you had some good questions on OZ's and I think adding them here would be helpful

Q: Can I 1031 capital gains (just the initial capital gain contributions) at 12/31/2026?

A: No. The 45 day and 180 day requirement would not be met as those are on properties sold today. So at 12/31/2026 the capital gains from the initial contributions would have to be recognized. The capital gains for 10+ years would still be tax free.

Q: Does the "significant renovation" piece have to be from capital gains as well?

A: Yes. All contributions into the fund must be capital gain. If there are cash contributions it will dilute the tax benefits. So the renovations would have to be financed through capital gains or through a loan. So for example buy an apt for $200k, put $200k into it that would qualify. If you put down $60k capital gains and the bank finances the rest that would potentially qualify for all of the tax benefits.

Q: If I hold property in an OZ for less than 5 years are there any tax benefits?

A: No. If held less < 5 years no tax benefits. 5-7 years = 10% initial capital gain reduction. 7+ years = 15% initial capital gain reduction. 10+ years = completely tax free appreciation and depreciation along with the 15% initial capital gain reduction.

Something to also keep in mind is that the investment must rise to the level of a "trade or business" which is a bit of a grey area in the tax code. A personal residence would clearly not qualify but how about a duplex or two? An apt building? Can you include properties you own outside of QOZ's in the "business?" 

That's where it gets a bit more interesting.

@Melissa Gittens Yep! I have a link to a national online interactive map that overlaps with the QOZ areas. Shoot me a PM and I can send you the link along with the steps on how to use it. You can search by address as well to see if something falls within a zone.

@Natalie Kolodij good to see you found the guidance on the trade or business part. I have seen attorney's, CPA's, fund managers, etc. quote incorrect material on OZ's which is understandable since the topic is so new and a lot of the guidance is unclear.

It will be interesting to see how QOZ's play out!

Keep in mind that a "significant renovation" has to exceed 100% of the purchase price. So if you buy a house for $300k you would need to put $300k into it which in a lot of cases is not likely. Otherwise a new build would qualify.

Another thing to keep in mind is that the investment must rise to the level of a "trade or business" Buying a principal residence (even if it is a new build)  would not be considered a trade or business and thus would not qualify (unless further guidance is issued)

@Melissa Gittens here is an overview of QOZ's:

https://www.biggerpockets.com/forums/51/topics/586...

@Ben Leybovich depends on what your cut-off for the definition of "re-development" vs  a big renovation project. The government wants major upgrades or new construction within these zones as to the 100% of basis requirement.

I know of a few clients that are planning on exercising the significant renovation part of the code by putting in a lot more than the purchase price.

@Lee Ripma Yes I am a real estate CPA for a national firm who is one of the leaders in real estate and have been dealing a lot with QOZ's. I know there were some people initially thinking you could put in cash but that turned out to be not true.

At this point only capital gains invested into an OZ Fund would give rise to the tax benefits. I have confirmed this with my firm, another top 4 accounting firm and a few fund managers.

If you want to discuss this further feel free to shoot me a PM here or on LinkedIn. We are still waiting on a lot of guidance with these OZ's but the consensus now is that cash investments are allowed but will not have any tax benefits.

@Colin Simon you are most likely correct. A "house-hack" would not rise to the level of a trade or business and thus would not qualify. There is a lot of controversy over what constitutes a business but a "house-hack" in my opinion would clearly not qualify.

@Lee Ripma As it sits right now "regular" money can be used to invest in QOZ Funds however they do not give rise to any tax benefits. The investment into the fund must be a capital gain in order to get the 10+ year hold benefits from appreciation and depreciation. If cash and capital gains are mixed then it gives rise to a pro rata treatment for tax benefits.

For example if an investor invested $500k capital gains and $500k cash into a QOZ fund (and received stock) only 50% of the appreciation on the stock after 10 years would be tax free as only 50% of the initial investment was capital gains.

The form to self-certify as an OZ fund has yet to be released by the IRS.

If you have already invested cash into a QOZ for the tax benefits I would highly recommend you speak with a specialized real estate CPA who is well versed in QOZ's.

@Lilian Chen I have heard from other QOZ leaders in our firm that the 1400 regs replaced the 20% with 50% in the section 179(d)(2) regs for related party. 

Thus if we had a new entity that is only related by 49% and had 51% unrelated 3rd party ownership that we could set up a new entity and purchase the property and then “substantially rehab” it.

So essentially an unrelated party must have > 50% ownership for the entity to be deemed unrelated.