Are the distributions also tax exempt?
The answer depends on whether your investment is in a partnership or corporation. If it is in a partnership, the answer depends on whether or not you have had income allocated to you on the face of the K-1 and if there are debt allocations made to you on your K-1. If you have debt basis, this can create tax basis which can allow loss deductions and potentially keep distributions from being taxable while you wait for a step-up or the 2026 gain recognition event.
The distributions of net operating income are generally not tax-exempt. The distributions from a refinance are generally tax-exempt but are also subject to an anti-abuse rule that discourages these types of distributions within two years of any contribution of capital gain. The distributions that are a return of equity capital could be taxable if they exceed basis in the Qualified Opportunity Fund (QOF) interest, which begins at zero.
Qualified Opportunity Funds (QOF) (and their investors) are subject to ordinary tax treatment on income earned during the investment period. Only proceeds from the sale of Opportunity Zone assets after an investor's 10-year holding period receive exclusion from tax.
Distributions of current distributions will be taxed at the investor level. If the Qualified Opportunity Fund (QOF) is a partnership, the distributions will not be taxed to the extent there is basis (items of income flow through the partners and they pay taxes on them). If corporations, distributions of earnings and profits may be taxes as dividends.
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