Should be OK, if an arms length lease, as per new regulations.
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Can the owners of a QOF have their spouses as its members and invest in residential real property in the zone, then lease it to its members for their personal use?
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I believe that might work.
Complicated. But doable.
Unfortunately, that is not how the law works for a variety of reasons. There are related party rules and business property rules with which you need to comply. That's a longer discussion, but this structure does not fit. Keep in mind the law was designed to create investments and jobs in areas of the country that need such investment. Simply having a home in a QOZ is not enough.
Probably not. There are several issues. The first is whether the arrangement has legitimate substance. If the spouses file jointly, there likely is no substance to the arrangement. The second is whether the QOF runs a legitimate trade or business. The third is whether you'll meet the substantial improvement requirement. Seems too cheeky to actually work.
Your question is unclear to me, but I think the general idea is that it will not work. I'm not sure what you mean about the owners of a QOF having the spouses as its members. Members usually means LLC. If so, there is no rule against having spouses as additional members (owners) of that LLC. The next question is a bit trickier, but I don't think it will work. Basically, you are saying that the QOF will be leasing residential real property (i.e., a personal residence) to a spouse. You are allowed to lease property that is used in a trade or business to a related party for purposes of meeting the 90% QOF QOZBP and the 70% QOZB tests, if the lease payments are at fair market value and there are no pre-payments in excess of 12 months. However, the missing component is that the property must be used in a trade or business, and this does not seem to be the case here.
There needs to be a business purpose for the fund. For this reason alone it would fail. An LLC owned by spouses in a community property state would disregard entities. For this reason it would fail. There also need to be related party violation issues.
The answer to this question is not as simple as you might expect. Of course, the latest IRS regulations state that leasing is a trade or business for OZ purposes. However, Section 280A of the code provides that no deductions related to leasing are allowed for leasing to family members, unless the tenant uses the property as their principal residence, and fair rent is charged. Interestingly, that provision does not directly address whether these two features make the activity a "trade or business," but this is the obvious implication of the rule. Of course, if fair rent is charged, then the Qualified Opportunity Fund will have income (and presumably offsetting depreciation and other deductions). So, there will be annual tax returns, there will have to be regular payments of rent, and there may be annual tax liability. This has the potential to be balanced by no tax on the ultimate sale of the property more than 10 years from now. Having said all this, I must note that this is really a technical tax analysis. It wouldn’t surprise me to have the IRS declare that this amounts to an "abuse," and it shouldn’t be allowed. And, of course, don’t expect a whole lot of tolerance from an auditor if you miss a few rent payments or otherwise get sloppy about running this as a "business."
I believe so, but I am not sure it makes sense for tax purposes. Rental payments received by the QOF will be taxable income and, for a personal residence, rent is not deductible. Accordingly, to get the benefit of no tax on appreciation after 10 years, the husband and wife will include in their income 10 years (or longer) of ordinary rental income. You have to run the numbers, but it likely is more efficient for the husband and wife to directly own the residence and get the $500,000 gain exclusion after two years.
That gets a bit tricky and beyond my knowledge. I would consult a tax attorney who specializes in OZ/OF.
I do not understand the question. Do you mean if investors in a QOF may lease property owned by the fund? The regulations provide special requirements for leases from related person not to related persons.
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