All Forum Posts by: Dalton DesRoches

Originally posted by @Shadonna N.:

@Dalton DesRoches is there a way to avoid gains with the sell.  Can I buy into the fund at more than 20%?

You can defer the gains until 2026 if you sell and then roll your gain amount into a QOF (you yourself can create an LLC that is designated as a QOF) within 180 days. Then this new investment you made will have no cap gain tax when you sell it if you hold it 10 years and substantially improve it.

The 20% thing is only if you want to buy back an ownership interest in the fund that bought your property. In that case, 20% ownership interest in the fund is the max you can do. 

So, the easy way to benefit is to sell the OZ properties you have and then roll the gains into a new QOZ investment. 

The other (and more complicated) alternative would be to sell the properties to a 3rd party entity that preferably has other OZ properties under its fund. You can then buy back into the fund that purchased your property with up to 20% ownership in that fund, and you wouldn’t be a related party, so you’d be okay (I told you this one was more complicated).

Here’s an example with numbers 

You sell a building for $100K and have a 60K capital gain. The purchasing fund has $500K of assets already. So, after purchasing they now have $600K of assets. You then buy a ~10% stake into this purchasing QOF fund by rolling in your $60K into the fund (60k / 600k). 

Here you were able to pull some cash off the table and still participate in the upside of the OZ program. 

To clarify also, the substantial improvement provision would make it pretty difficult to achieve this in most markets with house flipping I would imagine. For example, say you had a $300K house and let's say 70% ($210,000) of that purchase price is allocated to building and 30% ($90,000) to land.  You'd then have to put $210,000 of rehab into that house flip to meet the substantial improvement provision and qualify for the permanent opportunity zone exclusion (meaning no tax due when you ultimately sell your opportunity zone investment if held for 10 years). 

Opportunity zones are much easier to do with commercial properties and development rather than a single family flip. The numbers may still work with a single family flip, but be cautious of the substantial improvement provision. 

@Account Closed If you refinance out $100,000 - your deferred gain is still just the $100K you rolled in initially. That deferred gain won't be recognized until Dec 31, 2026 or when you sell the investment (whichever is sooner). A refinance is not a taxable event and you would still have your original equity position in the property. You can do a refinance, but can't use the proceeds to invest in a new property and get the OZ benefits. 

The substantial improvements have no effect on the amount of capital gain deferred. That amount is determined when you make the initial deferral. In the example where you roll $100K in and use $50 to purchase and $50 to rehab, the deferred gain amount would still be the $100K that you did not pay capital gains tax on when you rolled it into a QOF. That will be the amount deferred until December 31, 2016 or when you sell the investment (whichever is sooner). 

Hope this helps. 

@Rodney Blackwell To qualify for the benefits of an opportunity zone property, the property must have been purchased after December 31, 2017. Additionally, property must be purchased from an "unrelated party". So, you cannot purchase property back from yourself under a different LLC that you already own and receive the benefits of opportunity zones.

There is a slight workaround this, if you wanted to roll your LTCG amount (can roll either the full thing or part of it) into a QOF with other investors. If you are less than a 20% owner in the QOF, you would not be a related party and it appears you could purchase the property then and have it qualify as a QOF investment. (You can then take the capital gain from this sale of the 3-plex and roll it into a different QOF investment). Then, you would need to go through the process of "substantially improving" the 3-plex property by doubling the adjusted basis in the building. There are more rules around this and it can get pretty complex, so I'd definitely speak to a CPA if this is the ultimate route you decide to take. The other option would be to sell the 3-plex when you are done with it and then use that capital gain (plus your other $150,000 capital gain if you wanted) to roll into a QOF that you invest in another property in an opportunity zone. 

@Account Closed You are able to refinance your money out. However, since refinancing is not a taxable event, it wouldn't exactly work for the BRRRR method in a QOF. But there is a way around this (kind of). You would correctly be able to defer your first capital gain and you'd meet the substantial improvement provision in your example. Then, you are allowed to refinance a QOF investment. Your deferred gain is still $100,000.

However, when you go to buy the second property with the cash from the refinance is where that second purchase would not qualify as a qualified opportunity zone property since it was not purchased with capital gains (this is how the regulations read now, still in a comment period before they are finalized). 

What you can do is sell your first QOF investment (must dispose of the entire interest) and then if you roll that full amount into a new QOF investment within 6 months, that will work. You can then defer the second capital gain. As long as you follow these rules, you can keep doing this. 

Going along with your prior example, you invested your initial $100K capital gain into a QOF, met the provisions for substantial improvement, and then sold the property for $140,000.  You'd then have to roll the full initial deferral amount ($100K and then make a second deferral election for the $40K amount) into a new QOF investment (a bigger property perhaps). You can keep doing this as long as you get the funds rolled into the new investment within 180 days, and then you would still meet the requirements to keep deferring your initial capital gains ($140,000) until the later of December 31, 2026 or the date you sell and if you kept your money in a qualified opportunity fund for 10 years, you'd still get the permanent exclusion on the ultimate sale after 10 years. 

Hello All, I am a CPA that has been working with opportunity zone since they came out and wanted to pass along some information and thoughts I had on them. 

1. Must roll capital gains into a Qualified Opportunity Fund (QOF) and hold for 10 years to get the permanent exclusion benefit. Your original capital gain will be deferred until December 31, 2026 in this case and you'll only pay on 85% of the original amount. (Example - $100,000 capital gain rolled into a QOF, pay tax on $85,000 capital gain on December 31, 2026 if your investment in the QOF is still held at that point). Good time value of money savings here, but the big one is the permanent exclusion after 10 years. 

2. You can roll your investment from one QOF to another and still maintain compliance with the 10-year rule as long as you dispose of your entire interest in the QOF and roll it into another qualifying QOF within 180 days. 

3. You must substantially improve the property. This means doubling the adjusted basis within any 30-month time period. Adjusted basis does not include land value. Example - buy an old apartment building for $1,000,000 ($400,000 allocated to land, $600,000 allocated to building). You then need to increase your basis by $600,000 to "substantially improve" the property. 

4. In concert with the above substantial improvement stipulation, you can benefit by substantially improving the property at the same time 100% bonus depreciation is available (until January 1, 2023). Below is a visual chart depicting this, from an article I wrote for my company's website on the topic ( https://www.withum.com/resources/substantial-impro... )

Note the 30-month substantial improvement doesn't have to be where it is shown below, its stipulated in the Internal Revenue Code as being any 30 month period. 

5. 90% rule - a QOF must hold 90% of its assets in qualifying opportunity zone property. This can be stock, partnership interest, or business property. This will be measured semi-annually to ensure compliance. Example - QOF has $1,000,000 of capital gains rolled into it. It must have $900,000 tied up in opportunity zone property within 180 days. Limited to a max of just $100,000 cash on hand. 

6. 70% Substantially All Requirement - A qualified opportunity zone business must have 70% of its tangible property be QO Zone Business Property. 

7. Combine the two and you can have additional cash on hand - an LLC (the qualified opportunity zone business) would invest in the real estate directly and the QOF would own a partnership interest in the LLC. 90% x 70% = 63% invested into real estate and more room for cash on hand earmarked for future improvements / development. Much more flexibility here than the QOF investing directly into the real estate.

8. 31 month rule - working capital safe harbor for cash on hand. If you have a written schedule (and eventually spend cash according to the schedule) you can have cash on hand that doesn't count against you for the above 90% and 70% rules for 31 months. This is very favorable for putting cash aside that qualifies for the permanent exclusion and will be used to substantially improve property a year or two down the line. 

9. Partners in a partnership - if your partnership has a capital gain and does not elect to defer it at the partnership level, each individual partner can elect to defer their respective portion of the capital gain into a QOF. In this case, they may have additional time over and above the 180 day rule to roll the gain amount into a QOF. They'd have 180 days on the first day the partnership would be required to pick up the gain as taxable income. So for example, calendar year partnership with four partners, they have a capital gain of $400,000 on May of 2018. The first day it would be recognized by the partnership would be January 1, 2019 - so the individual partners would have until June 30, 2019 to roll their respective $100,000 capital gains into a QOF. This is much more advantageous than the otherwise noted rule for individuals to roll over the gain amounts by November 2018 (180 months from the capital gain). 

Please feel free to reach out or respond if you have any questions - I know this can be a lot, but I am excited to share my knowledge of the program with others, continue to learn, and help out in any way I can. 

I am also a CPA and have been researching the new law as well as looking into and discussing its potential use with other parties. It is indeed very interesting and Austin does a great job explaining it. One thing I will add is that the “substantial improvement” part of the law - aimed at development / redevelopment - is especially interesting because you can do a cost segregation study / bonus depreciate parts of your property in connection with meeting the substantial improvement stipulation. With bonus depreciation now at 100% for certain business assets, you can recognize very nice up front savings and meet the QOZ qualifications while performing a build out for the tenant. Investors can search “[Insert State] Opportunity Zones Map” and I believe most, if not all states, have a website set up with a listing of all designated zones as well as a GIS map that shows all of the zones in your state. This has worked in all of the states I have tried so far. If anyone would like to discuss more, feel free to message me, I’d be happy to talk and bounce ideas off others. Hopefully we get more IRS guidance soon as well, as we are in a bit of the Wild West currently in regards to that.

@Account Closed thank you both! 

Hey everyone, 

My name is Dalton DesRoches and I have recently been browsing BP and looking more seriously at getting into real estate investing. I am loving the podcasts so far on my daily commute. 

As of now, I am hoping to dig deeper into commercial real estate investing and I am also very interested in house hacking, though I'm aware this arrangement could possibly be difficult in the NoVA area. However, I am very open to pretty much all forms of investing, as I'm still trying to learn as much as I can and see what I am best suited for. I am a recent graduate from Virginia Tech (Blacksburg) and I am originally from Virginia Beach, so I am also pretty familiar with those areas and I plan to look for deals in those places as well. 

I am a soon-to-be CPA, having passed all parts of the exam, I will be licensed in a couple of months. I certainly won't have all of the answers, but I hope to stay active on here and use my accounting background to help out whenever possible!  

I look forward to meeting all the great people of BP both here and at some local networking events. From just browsing the forums the past couple of days, this seems like an awesome community. 

Dalton